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An Inverse Relationship, CAPE and Long Term Interest Rates

There is an inverse correlation between the level of long-term interest rates (US 10 yr treasury rates) and price - to - earning ratio (P/E) of the entire market (S&P500), which is presented by the Cyclically Adjusted Price Earnings Ratio (CAPE) above. As interest rates rise through the Fed's rate hiking period, P/E of the market continues to drop.


Historical Performance of US Treasury Rates and Cyclically Adjusted Price to Earning Ratio of S&P500
Historical Performance of US Treasury Rates and Cyclically Adjusted Price to Earning Ratio of S&P500

Looking at earnings yield of the S&P500, which is the E/P ratio (the inverse of CAPE), the positive relationship between the level of interest rates and E/P ratio is clear in the above image. P/E ratios are expected to drop as the Fed continue to increase the rates. When EP ratios are close to the US 10-year rates as shown above, it is an indication of uncertainty.


Historical Performance of US Treasury Rates and Earnings Yield of S&P500
Historical Performance of US Treasury Rates and Earnings Yield of S&P500

August 2022 Market Update


Download a comprehensive investment research report of August 2022 Review: Rate Hikes Leading to Decline in Expected Inflation off its Peak & Economic Downturn by visiting the Basic Modelyze page.


Source:


Data in this Blog is sourced from Refinitiv, FRED, Morningstar Direct, Robert Shiller Data Library and Ken French Data Library as of Aug 31, 2022, market close and includes equities listed on North American exchanges.

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