Do not be fooled by the current rebound. 'This' will fall first from here｜Seong Sang-hyeon's Macro Beyond, Part 4-1

The speaker says the question of whether it is acceptable to hold stocks when interest rates are high should be reframed as: which companies' earnings are overcoming the higher cost of capital? Using three figures—the US 10-year Treasury yield of 5.2% (up 1.2%p from the end of February (month 2)), an equal-weighted/market-cap-weighted index ratio of 91.8 (with the end of February (month 2) set to 100), and a stock earnings yield minus Treasury yield spread of 0.01%p—he diagnoses pressure from interest rates, concentration in a few large-cap stocks, and the disappearance of stocks' relative appeal. Of the rise in the 10-year yield, 0.7%p came from the expected rate path and 0.5%p from the term premium, meaning 42% of the total came from the term premium. He views a shift in the balance toward the term premium as an unfavorable signal for stocks. Citing the equal-weighted index's slide toward its lows for the year in September (month 9), after attempting to recover to 99 in mid-August (month 8), he points out that index strength does not mean strength across the entire market. He says that subtracting a Treasury yield of 5% from the earnings yield of 5% implied by a PER of 20 times leaves 0 or a negative value. With the shield relative to bonds gone, he calls for higher standards when scrutinizing earnings estimates, cash flows, and consistency between earnings and stock prices. He qualifies this as a signal to strengthen stock selection, not a sell signal. The comparison with the 1970s and specific strategies were only previewed for a follow-up installment and were not included in this installment's captions.