Risk-Free Is Dead: Why I Am Very Bullish On Equities Going Into Q4

The S&P 500’s forward earnings yield is about 5.2%, matching the 10-year Treasury yield, while expected double-digit earnings growth is cited as a buffer against asset inflation. The article argues that ultra-tight credit spreads and U.S. Treasuries yielding more than Italian or Greek debt indicate weakening trust in government debt as “risk-free,” favoring equities.

Analysis

The earnings-yield/Treasury comparison is not a valuation “all clear”: equity earnings are uncertain, residual claims and exposed to multiple compression, while Treasury cash flows are contractual. The case for equities therefore depends on earnings revisions actually delivering—not merely on the yield spread. A downgrade cycle or higher real yields could erase the apparent cushion quickly. Likewise, US yields exceeding Italy’s or Greece’s are not, by themselves, evidence of lost confidence in US debt; currency, inflation, maturity and term-premium differences matter.

The more actionable signal is asymmetric: tight credit spreads leave high-yield investors with limited compensation if growth or liquidity deteriorates, while equity upside still has a path if earnings hold up. Near term, expect relative-value sensitivity to real yields and earnings revisions; over 1–3 months, watch forward EPS revisions and credit spreads together. Over 6–18 months, sustained earnings growth would support equities, but a shift toward inflation-driven yields or weaker margins would challenge both the valuation and growth arguments. The bullish thesis is falsified by broad downward earnings revisions alongside widening credit spreads, or a sustained rise in real yields that compresses equity multiples. No single asset-class yield comparison establishes that government debt is losing its reserve or safe-haven role.

Key Decisions for Investors

• Keep equity exposure, but do not add solely because the S&P 500 earnings yield matches the 10-year yield. Stage any additions and favor profitable, balance-sheet-resilient businesses over the broadest possible reach for growth; reassess if forward EPS revisions turn broadly negative.
• Avoid adding to high-yield credit at exceptionally tight spreads. Prefer higher-quality credit exposure; treat a sustained spread widening accompanied by weaker earnings revisions as confirmation to reduce risk, rather than shorting credit on spread tightness alone.
• For a relative-value expression, consider a measured long-SPY/short-TLT position only if real yields are stable-to-lower and earnings revisions remain positive; size it as a macro-sensitive trade, not a risk-free yield-arbitrage. Exit or reduce if real yields rise materially or earnings revisions roll over.
• Monitor inflation and real-yield data, forward earnings revisions, and high-yield spreads over the next 1–3 months. The supplied information does not establish current positioning, valuation versus history, or the breadth of expected earnings growth; verify these before increasing aggregate equity risk.