Sentiment has recovered quickly in recent months, with stocks climbing the so-called wall of worry to current levels. Recall that sentiment was deeply negative coming into 2023, partly because of all the recession talk. Of course, the economy has held firm, which has allowed sentiment to improve. Now, by many measures, the mood out there is leaning bullish again. In the Investors’ Intelligence Survey, there are now more than 55% bulls versus less than 20% bears, a net reading that’s more than a full standard deviation to the high side (this measure was at the opposite end of the spectrum in late-2022). Individual investor survey results have also swung in that direction.
Meantime, investors are again grappling with higher bond yields. With the 10-year Treasury yield pushing to 4.3% this week, the spread between earnings yields and bond yields continues to compress. With the S&P 500 forward earnings yield now sitting at around 5.4%, the spread versus 10-year Treasuries has narrowed further to just over 1 percentage point. This has effectively slammed shut the yawning gap seen for much of the past decade during the era of ultra-low rates. Is this a sign that valuations are wildly stretched? Maybe a bit, but not necessarily. Keep in mind that pre-financial crisis, that spread trended around 1.5-to-2.5 percentage points, and it might be reasonable to think that the whole valuation complex is adjusting back to the bygone days before disinflation pressure, ultra-loose monetary policy and suppressed interest rates.