Yield Quagmire Is Playing Havoc With S&P 500 Valuation Models

Yield Quagmire Is Playing Havoc With S&P 500 Valuation Models

(Bloomberg) -- The longer bond yields stay stuck, the jumpier the stock market seems to get. Heading into a historically volatile month, that’s the heart of the dilemma facing equity investors as they try to balance divergent signals on valuations and growth.

On one side is the claim that very low interest rates make stocks worth more by boosting the value of future profits. Against that is an equally plausible view that falling yields denote pessimism about the economy that make stocks less valuable in anticipation of sluggish growth. It’s resolving, for now, in a kind of herky-jerky turbulence, such as this week’s, when despite rising on three of five days the Nasdaq 100 Index ended down 1%.

The problem for investors is that action in bonds is among the most persuasive valuation case for equities -- in both directions. Goldman Sachs Group said this week that with yields as low as they are now -- or even with them rising modestly -- models including a dividend-discount analysis imply the S&P 500 Index could rise another 6% by year-end.