Daily Spotlight: Bond Valuation Improves

Argus

•

Jun 04, 2025

Summary

Our Stock-Bond Barometer asset-allocation model is indicating that the two major portfolio asset classes are near parity on valuation. The model goes back to 1960 and takes into account real-time prices, historical growth rates, forecasts of short- and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, corporate earnings, and other factors. The output is expressed in standard deviations to the mean, or sigma. The mean reading is a modest premium for stocks, of 0.09 sigma, with a standard deviation of 1.05. The current valuation level is a 0.31 sigma premium for stocks, up from 0.05 last month and reflecting a strong May for stocks. Other valuation measures show reasonable multiples for stocks. The forward P/E ratio for the S&P 500 is about 19, the midpoint of the normal range. The S&P 500 dividend yield of 1.29% is below the historical average of 2.9%, but the relative reading to the 10-year Treasury bond yield is 29% compared to the long-run average of 39%. Further, the gap between the S&P 500 earnings yield and the benchmark 10-year government bond yield is 319 basis points, compared to the historical average of 400. We also look at S&P valuations in terms of sales and book value. On price/book, it is no surprise that stocks are priced at the high end of the historical range, given that IT stocks, which have low capital bases, are the biggest component of the market. On price/sales, the current ratio of 2.