Stocks are undervalued relative to bonds

The earnings continue to be robust according to Zacks data.

Rates have generally eased back down over the last month, and they yield curve is still basically flat, but with a bit of an upward slope. This sort of a yield curve is consistent with moderate positive economic growth going forward. The earnings yield on the S&P 500, based on 2006 earnings remains well above the yield on the ten year t-note (6.63% versus 5.05%). This indicates that stocks are undervalued relative to bonds.

Interest rates as the denominator in the valuation of equities are obviously important, but so is the denominator, Earnings. The earnings picture remains very robust, both for this year and next.

Full-year earnings estimates are rose slightly last week. During the past seven days, estimates were raised on 89 S&P 500 member companies and lowered on 71 companies. Over the last month a total of 870 estimates for this year have been raised versus only 626 that have been cut (ratio of 1.63). For next year, 775 were raised while only 502 were cut (ratio of 1.78). While the ratios are down for both years, both remain at extremely high levels, indicating virtually no chance that earnings are about to collapse.