US 10-⁠yr yield → US valuation

Common explanation (Cause · opposite direction): Higher rates make future profits worth less today, weighing on valuations.

This issue: US 10-⁠yr yield at 91 (hot), US valuation at 99 (hot) — both above normal, not in line with the common explanation (this is an inverse link).

Hot and cold describe position, not good or bad: warm does not mean a fall is coming, and an extreme reading does not mean a quick reversal. We describe history only, with no buy or sell advice.

Where it stands now

Where the two indicators stand this issue

US 10-⁠yr yield: 2.09 percentage points above its 10-year average. US valuation: Now 40.7 times earnings.

Tests

Does this link hold up?

Common explanationHigher rates make future profits worth less today, weighing on valuationsSource: Federal Reserve Bank of San Francisco, “Assessing Recent Stock Market Valuation with Macro Data” (2020).
Tested against our dataAgreement between the positions of US 10-⁠yr yield and US valuation (6-month lag), measured in the direction of the common explanation: +0.37 (an opposite-direction link: the raw correlation is −0.37, and a negative correlation fits, so the sign is flipped). Looking at every 5-year period (shifted one year at a time), the two moved in that direction in 24 of 49. Weak or inconsistent
Periods when it did not holdAcross 49 5-year periods, out of step in 1973⁠–⁠1979, 1986⁠–⁠2020 and 2021⁠–⁠2026.

History

The two lines, overlaid

Data: Federal Reserve H.15, via FRED (Federal Reserve Bank of St. Louis); Professor Robert J. Shiller, public data. Positions: our calculation.

US 10-⁠yr yieldUS valuation

Limits

What this card cannot tell you

Moving together does not prove that one causes the other.
Links change over time; periods when this one did not hold are listed in full.
This is the historical record, not a forecast.

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