Capital Markets: Observations and Insights Autumn 2019
An Easy Choice? Lending vs. Owning
LENDING vs. OWNING
• Investors are paying a big premium for the safety of Treasuries relative to equities but how risky are stock fundamentals over the long term? ‒ Over 10-year periods in the past half century, S&P 500 EPS has grown an average of nearly 7% annually, or almost 90%, while a Treasury bond coupon does not grow
Stock P/E Is Attractive Relative to Treasuries…
…And Equity EPS Can Grow!
S&P 500 P/E 10-Yr Treasury "P/E"
S&P 500 EPS Treasury Bond Coupon
70x
-2% 0% 2% 4% 6% 8% 10% 12%
60x
50x
40x
30x
20x
10x
0x
Rolling 10-Yr Annual Growth
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
2018
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
2018
Source: FactSet, Robert Shiller, Alger. Notes: periods used were annual. Treasury “P/E” is inverse of yield to maturity. Earnings per share (EPS) is the portion of a company's earnings or profit allocated to each share of common stock.
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