A great chart from Felix Salmon and Reuters showing that the S&P 500 earnings yield minus the yield on the 10-year has never been wider:
[credit provider=”Felix Salmon, Reuters” url=”http://feeds.felixsalmon.com/~r/felix-all/~3/sHw8zZ_SsSo/”]
Others have taken notice of this.
Matt Busigin made a similar point here, though he notes that stocks were actually this cheap (compared to Treasuries) back in 1975, and that that year, earnings proceeded to collapse by 18%, and yet stocks rose by 32%.
Meanwhile, Goldman’s observation is that dividend yields (not earnings yields) are extremely high historically compared to Treasury yields.
All of this leaves open a few possibilities, of course. One is that stocks are cheap. Another is that the economy (and thus earnings) are about to fall off a cliff.
The other worry — and we suspect that this is what a lot of people are dreading — is that thing in Europe (and maybe the US) go into real crisis mode, and that for the first time in ages, the government doesn’t have the tools to deal with them, and things get horrendous, in which case, the spread probably will go a lot wider.