A just-published report concluded that U.S. 10-year Treasurys would outperform U.S. stocks over the next decade.
Measures of the U.S. equity risk premium are historically low, indicating that stocks are expensive relative to bonds. The risk premium will be biased higher over time as corporate profits have been unsustainably strong.
The excess returns that equities have generated relative to bonds over the past decade or more are high by historical standards and are on track to weaken. Corporate earnings growth will inevitably slow in the coming year(s) from today’s elevated starting point. Moreover, after a grim past 10 years, bonds are likely to generate better total returns going forward.
While prospects for bonds over equities will improve over the longer term, the next 6 to 12 months will still be challenging as economic growth remains resilient, inflation is sticky and the Fed is behind the curve.
