Stock Market Math Looks Shaky as Bond Yields Surpass Stock Returns

The stock market is facing a problem known as math. On one hand, bond yields are surging higher, making bonds more attractive compared to shares. On the other hand, massive amounts of capital are flowing into the artificial intelligence sector, but earnings have yet to start flowing out.

When bond yields rise, they determine everything from mortgage rates to car loan interest rates. The yield on the 10-year U.S. Treasury bond has hit its highest level since 2002, and similar big moves are happening in other advanced economies.

The disparity in yields between bonds and stocks is dramatic. Five years ago, a 10-year Canada bond yielded only 1.5%, while Royal Bank of Canada shares paid out double that amount in dividends. Now, the math has reversed: the 10-year Government of Canada bond yields nearly 4%, while Royal Bank shares pay only about 2.5% in dividends.

The 'bond king' says the U.S. stock market is like a diseased tree. The earnings yield on the S&P 500 is just about identical to the yield on a 10-year U.S. Treasury, at around 5%. This poses a challenge for stock investors: no sane investor wants to buy risky stocks if they can get similar results with safe, boring government bonds.