The 10-year Treasury yield hit 5.23% on Sept. 25, its highest level since 2007, narrowing the gap with stock returns. The S&P 500 only needs its companies' earnings to grow about 4% a year to match the bond over a decade, a pace the index has beaten in roughly four of every five 10-year stretches since 1950.
Treasury yield reaches highest level since 2007
The 10-year Treasury yield reached 5.23% on Friday, Sept. 25, its highest level since 2007. The climb has been fast: the yield started 2026 near 4.2%, stood just under 4.8% at the start of September, and was still below 5% as recently as Tuesday, Sept. 22. Sticky inflation and heavy borrowing by the federal government and AI data-center builders have pushed it higher.
The bond earns more right now
Using trailing 12-month profits, FactSet puts the S&P 500's price-to-earnings ratio at 25.8, which works out to an earnings yield of about 3.9% — well below the bond's 5.2%. The Vanguard S&P 500 ETF trades near $711 a share and carries a dividend yield of about 1%, so a fund investor collects only a fraction of that 3.9%. Choosing the fund over the bond means giving up roughly four percentage points of income in the first year.
How much earnings growth closes the gap
The rest of the index's earnings stays with companies to reinvest or spend on buybacks, which is where the case for stocks starts. At a 1% dividend yield, the fund needs earnings to grow about 4% a year to match the bond's 5.2% over a decade, assuming the market keeps paying the same valuation multiple. Robert Shiller's long-term data shows earnings rose at least that fast in around 80% of 10-year stretches starting from 1950, with a median stretch of about 6% a year. Over the 10 years through June, index earnings rose around 13% annually.
Where the bond could still win
That comparison assumes the price-to-earnings ratio holds steady. A falling multiple is the biggest risk to buying stocks now: the index's valuation would only need to ease from about 26 times earnings to about 22 times over the decade for 6% earnings growth to trail the Treasury. Twenty-two times would still sit above the S&P 500's long-run average of around 16, though below its 10-year average of 23.6.
It has happened before. In January 2000, the S&P 500 traded near 29 times earnings while the 10-year Treasury paid about 6.7%; over the following decade the index's total return was slightly negative while bondholders collected every coupon.
Source: The Motley Fool
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