why i’m not more bearish equities compared to 6 months ago

Programming Note: I normally publish Munchies on Wednesday and the paid post on Thursday, but this week I will post both a day early, as they are market-related and I want to get them out ahead of the Fed meeting.

Friends,

I’ll start with updating some broad market observations I laid out in March and then square that with what option surfaces are telling us in the context of the Fed meeting and beyond. The Fed meeting is a highly skewed event with a 25 bp hike more than about 90% priced in.

Recent context:

The Jackson Hole keynote was on 8/28/26. The probability of a rate hike shot from 35% to 57% in one day.

The 10-year yield has rallied from 4.67% on 8/26 to 4.96% as I write on 9/14.

In that same window, the SPX is down a mere 50 bps and the NDX is basically unched.

Let’s rewind to my March post trading is like a sudoku puzzle with prices as the given numbers. I compared earnings yields to bond yields to get an equity risk premium. This comparison in the modern era of massive budget deficits, where a large “G” in the Kalecki-Levy world tells us that money ends up as private sector nominal income by identity*, never flatters equities. We can reconcile skinny equity risk premiums the same we reconcile low earnings yield any stock…there’s an expectation of growth.

If we are desensitized to the low absolute level of equity risk premiums, it is because it has been easy to presume nominal growth. We have relatively low unemployment, technology companies growing quickly despite massive scale, and, I almost forgot, A GOVERNMENT THAT IS EXISTENTIALLY POT-COMMITTED TO DEFICIT SPENDING.

“But, we have a Republican president.”

Ok, define Republican. Because if you look closely at our fiscal…oh never mind. Nobody cares. We’re well past fiscal discipline as a political delimiter.

The more money there is, the more surface area there is for theft/grift/graft.

[While this is now quite obvious and exploited by both right and left, Don’s brazenness feels like it’s giving everyone permission. He is a populist wrestling everyone’s birthright to cheat away from the cloaked political elites who once monopolized it. That sentence is the dress…whether you see blue or gold is up to you.]

Alrighty then, where were we? Ahh, yes, nominal growth as a given, because our society is a passenger in a global economic trolley problem. Fantastic. Instead of fretting over the level of the equity risk premium, we can look at the past 6 months to consider the change or, in a sudoku-esque way, solve for what needs to happen for the risk premium to not get worse.

Thus far, higher energy prices and higher bond yields haven’t produced the equity decline in the scenario I outlined. My hunch is the market got more expensive on a relative basis, but let’s investigate.

First, the updated numbers.

Market quotes below are September 14 intraday observations, taken at different times. The equity calculations use the same snapshot as the charts.

WTI oil is up 18.5% since the March post (March price from 3/27/26)

RBOB gasoline is up ~28%

IEF on a div-adjusted basis is down 1.9%, about half what the duration (which is a snapshot like delta) expects because you picked up over 200 bps of carried interest (ie those divs) in the meantime.

Equity valuation as the missing Sudoku number

In late March, I used an equity earnings yield of roughly 5% vs 4.4% ten-year Treasury yield. This represented a 60 bps nominal equity risk premium and ~300 bps in real terms. My downside scenario considers what might be expected if the Treasury yield reached 5.5% and equities needed to offer another 50 bps above that. The target nominal earnings yield would rise to 6%, requiring roughly 17% equity decline if earnings stayed flat.

Of course, if earnings growth increased fast enough, equities don’t need to decline at all to maintain the same equity risk premium to bond yields.

That leaves us with two questions:

• What spread do today’s earnings estimates offer?
• How much more earnings would restore the 50 bp equity risk premium?

At SPX 7,637.79, the approximately $397 of earnings expected over the next twelve months gives us a 5.20% earnings yield. Against a 4.96% Treasury yield, that’s only a 24 bp spread.

To get 50 bps over Treasuries, we need a 5.46% earnings yield:

7,637.79 × 5.46% = $417 of annual EPS.

How close are we to earning that much?

The first-half figures total approximately $181 per share, up 39% from the same quarters in 2025. Second-half estimates total approximately $183. The forecast calls for roughly maintaining the first-half earnings level through the rest of 2026, which represents 26% growth over the second half of 2025. Historically high, but a slower pace vs the first half’s increase over the same period a year earlier.

For the full calendar years, consensus is $362 in 2026 and $417 in 2027. That’s another 15% growth after this year’s expected 32% increase. Together, those forecasts take annual earnings from $275 in 2025 to $417 in 2027—52% growth in two years. These figures come from the same FactSet earnings series.

Back to the valuation. The calendar-2027 estimate already gets us almost exactly to our $417 target and assumes EPS growth of 15%, much more reasonable compared to historical changes and far slower growth than 2026 experienced.

Despite the rise in yields and inflation, consensus equity pricing offers an earnings path that supports approximately the original 50 bp spread benchmark. It requires delivering the rest of 2026 plus “only” 15% subsequent growth next year.

The equity risk premium has been skinny, but EPS growth has delivered such that those risk premiums aren’t actually shrinking despite the continued outperformance of equities vs bonds. I wouldn’t call that bullish exactly, but it’s not bearish versus where we were 6 months ago. When I first started this investigation with the high energy prices and rising yields, I expected the “missing Sudoku number” of equity risk premium to look even more paltry, but sparkling earnings have bailed the multiples out.

Stay groovy

☮️

End Notes

Gasoline futures and CPI

Persistently high fuel prices burden consumers and businesses. But keeping the price high doesn’t mean inflation stays high. If gasoline rises from $2 to $3 and stays there, year-over-year inflation is positive until the comparison catches up. Comparing $3 with $3 gives zero inflation.

The spread benchmark

“Equity risk premium” here is shorthand for earnings yield minus the nominal ten-year Treasury yield. It is a valuation comparison, not a complete estimate of equities’ expected excess return. Earnings are not contractual interest payments and are not necessarily distributed to shareholders.

Comparing that earnings yield with the roughly 2% TIPS yield gives a 300 bp difference. That is a comparison with a real bond yield, not a separately calculated real equity risk premium. My mental shorthand for real equity returns is that they typically realize between 300 and 600 bps over the risk-free rate. Equity valuation is on the high side (ie low real earnings yield over CPI), but it has been for a while, as it has been priced for growth which has been repeatedly confirmed.

Market snapshot and forward calculation

The calculations hold SPX at 7,637.79 and the ten-year Treasury yield at 4.96%, using September 14 intraday observations from MarketWatch and Trading Economics. These are not closing prices.

Tracking 2026

FactSet lists Q1 2026 EPS of $80.99 and Q2 EPS of $100.28. Q1 is shown as actual; Q2 remains marked as estimated. The $181.27 first-half total therefore should not be described as entirely finalized.

Index composition

The S&P 500’s membership changes. Depending on how a historical series is constructed, year-over-year earnings changes can reflect additions, deletions and changes in index representation, as well as growth within businesses.

Comparing each period’s membership differs from comparing a fixed set of companies across both periods. The chart therefore describes the published index earnings series, not a constant-company measure of organic growth. No adjustment for composition has been made.