Jeremy Siegel, a finance professor at the Wharton School and chief economist at WisdomTree, notes that 30-year Treasury Inflation-Protected Securities (TIPS) now offer real returns of approximately 3.35%. This yield level is the highest observed in 20 to 30 years, putting pressure on the relative attractiveness of equity investments.
According to Siegel, a market valued at 20 times earnings provides a return of about 5% above inflation. This results in a risk premium of roughly 1.65 percentage points for holding stocks. Meanwhile, data from Bloomberg shows that the 10-year Treasury yield reached 5.33% on Thursday.
The Magnificent 7 tech stocks maintain profit margins between 50% and 70%, whereas other companies typically see margins of 7% to 10%. Higher borrowing costs disproportionately impact firms with thinner margins, which has stalled the market rotation observed earlier this year. In September, 75% of S&P 500 stocks declined despite a slight rise in the index.
Siegel advocates for two additional Federal Reserve rate hikes this year, while the central bank's projections suggest only one. He proposed that Fed Chair Kevin Warsh could skip an October increase in favor of a half-point hike in December. Fed Vice Chair Philip Jefferson stated that officials may require more time to assess future policy moves.
