Stocks maintain a premium over bonds amid a resilent market, according to Jeremy Siegel, who said Monday that investors comparing equity and Treasury yields may be making an error.
"The market continues to demonstrate remarkable resilience. Lower oil prices, easing Treasury yields, and the relentless buildout of artificial intelligence infrastructure are still providing a favorable backdrop for risk assets," Siegel, the Wharton School and WisdomTree economist, wrote in his weekly commentary.
Siegel also said he wanted to correct a misconception published recently in a major financial publication — the notion that the equity risk premium has disappeared because stock earnings yields and Treasury yields both sit near 4.5%.
"This comparison fundamentally confuses real and nominal returns. A stock purchased at a 20 multiple offers roughly a 5% real earnings yield that can grow with inflation over time. A 5% Treasury bond delivers a nominal return," he said.
"The proper comparison is against Treasury Inflation-Protected Securities, where real yields remain around 2%," Siegel added. By that measure, equities offer roughly a 2.5% to 3% premium, "close to their long-term historical average. Investors who compare stock earnings yields directly against nominal bond yields are making one of the most common valuation errors in finance."
Siegel remains positive overall about the economy and stock market.
"For investors, the broader message remains constructive. Economic growth continues, liquidity is abundant, yields are retreating from recent highs, and the AI investment cycle remains extraordinarily powerful. A still-attractive equity risk premium continues to support the long-term case for stocks," he said.
Siegel did note that productivity statistics haven't kept pace with expectations, saying that the past two quarters have been "relatively subdued." While anecdotal evidence surrounding AI adoption is "overwhelming," the measurable gains haven't fully emerged yet in aggregate economic data.
"I remain highly optimistic that AI will eventually drive a significant productivity renaissance similar to past technological revolutions," he said. "The spending boom in data centers and computing infrastructure is clearly occurring today, while the productivity payoff likely lies further ahead."
Credit: Lila Photo for TD Ameritrade Institutional
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.