Ed Yardeni Can Live With Higher Yields for the Sake of Earnings
As harrowing as it has been to watch bond yields jump, watching them sit still would’ve been worse for stock investors banking on a major revival in earnings this year.
So says Ed Yardeni, who watched with everyone else as rising rates on 10-year Treasuries sowed angst through global equity markets last week. Not only is the veteran strategist comfortable with yields running up to 2%, he sees it as an inescapable backdrop for the sort of economic turnaround already priced into stocks.
“It’s an indication that the economy is doing well and that will be very good for earnings,” Yardeni, the president and founder of Yardeni Research Inc., said by phone. “The years prior to the pandemic, bond yields were 3% to 4%. So I don’t really have a problem with 2% to 3%, which is probably where they’re likely to settle in the second half of the year.”
Underpinning Yardeni’s confidence is an economy roaring back from the Covid-19 pandemic, buttressed by vaccines and President Joe Biden’s $1.9 trillion stimulus package. It’s those things that have pulled yields up from below 1% and set the stage for S&P 500 companies to rattle off the streak of earnings growth analysts currently estimate -- at least six quarters of double-digit expansions, including a 49% surge in the June-April period.
The view has some basis in history, when periods of sustained earnings growth are compared with bond yields at the time. Since 1962, S&P 500 companies had achieved eight episodes of prolonged profit expansions such as the one contemplated now in analyst estimates. In six of them, yields rose over the stretch, adding 81 basis points on average.