Why stocks still look cheaper than bonds

Recent U.S. equity market weakness and volatility likely has some investors wondering if they should cut their exposure to stocks in favor of fixed income/bonds. But by at least one metric, such a move could be premature. Stocks remain inexpensive relative to bonds, and while the premium they offer has been steadily dropping for years, the argument in favor of equities doesn’t look likely to reverse soon. Equities are cheaper than bonds when stocks yield more, and that continues to be the case. When you compare the S&P 500’s earnings yield against the yield offered by fixed income investments (i.e., investment-grade corporate bonds), stocks look cheaper than bonds. And if you’re an investor, you want to buy when things are cheap in order to take advantage of more potential upside performance. According to WSJ Market Data Group, the S&P’s current earnings yield is more than 4%. Investment-grade corporate bonds, as measured by the iShares iBoxx $ Investment Grade Corporate Bond ETF yield 3.4%. The view comes after a whirlwind six months for the U.S. stock market, a period that has seen equities hit repeated records before logging the longest correction for major indexes in a decade. The past six months