Rising interest rates may put a wall in front of stocks

One of the most common methods for measuring the attractiveness of stocks is by comparing the earnings yield against long-term interest rates on government bonds. (The difference between these two is called the equity risk premium.) Theoretically, investors should demand a higher potential return for taking additional investment risk. Because of this, the earnings yield on stocks has historically been higher than interest rates on government bonds. But occasionally, long-term interest rates will offer a higher GUARANTEED return than the stock market earnings yield. This is a signal that stocks are overpriced and it’s where things stand in September 2023. Of-course there is no single measure that dictates the direction of the market, but this is an important one suggesting risk has increased.

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