Most people obsess over P/E ratios but completely miss the other half of the equation: interest rates.
Valuation is just discounting future cash flows, and the discount rate is anchored to the risk-free rate. When rates move, every asset's denominator gets repriced—most just never look at that denominator.
September was wild. Fed hiked 25bps on Sept 16 (first hike in 3+ years), taking fed funds to 3.75-4%. Unanimous vote. Said they might do it again. 3-month Treasuries hit 4.08%, 2-year at 4.7%, 10-year briefly touched 5%. ECB joined the party Sept 10, lifting deposit rate to 2.5% (second hike in 3 months) as eurozone inflation spiked to 3.3%.
Here's where it gets interesting:
Park cash in short-term Treasuries, do nothing, earn 4% risk-free. That's equivalent to a 25x P/E asset with zero growth and zero downside.
Meanwhile, US equities trade at ~19x forward P/E (5.2% earnings yield), just 20bps above the 10-year Treasury at 5%.
You're getting barely any premium over bonds while taking full earnings risk and volatility exposure.
Multiple expansion is dead. The only way to make money now is through the numerator—actual earnings growth.
If the spread vs Treasuries is razor-thin and the business is mediocre, skip it.
If the spread is wide AND earnings can actually grow, then we're talking.
Valuation is just discounting future cash flows, and the discount rate is anchored to the risk-free rate. When rates move, every asset's denominator gets repriced—most just never look at that denominator.
September was wild. Fed hiked 25bps on Sept 16 (first hike in 3+ years), taking fed funds to 3.75-4%. Unanimous vote. Said they might do it again. 3-month Treasuries hit 4.08%, 2-year at 4.7%, 10-year briefly touched 5%. ECB joined the party Sept 10, lifting deposit rate to 2.5% (second hike in 3 months) as eurozone inflation spiked to 3.3%.
Here's where it gets interesting:
Park cash in short-term Treasuries, do nothing, earn 4% risk-free. That's equivalent to a 25x P/E asset with zero growth and zero downside.
Meanwhile, US equities trade at ~19x forward P/E (5.2% earnings yield), just 20bps above the 10-year Treasury at 5%.
You're getting barely any premium over bonds while taking full earnings risk and volatility exposure.
Multiple expansion is dead. The only way to make money now is through the numerator—actual earnings growth.
If the spread vs Treasuries is razor-thin and the business is mediocre, skip it.
If the spread is wide AND earnings can actually grow, then we're talking.