Wednesday's Market Minute: The Bar For Disappointment Is Low

At first glance, the stock market may not look grossly expensive. Price to earnings multiples are still significantly below their peak from covid trading mania. But that's just surface-level. The big difference between now and then, of course, is that investors have a lot more options in the bond market to capture a 5% yield in a short amount of time. Framed this way, stocks have gotten much more expensive.

This is probably starting to show up in trading behavior, with rather innocuous events causing significant downside in some important companies. One easy example is Apple AAPL, whose shares panicked over last week's story about Chinese restrictions. Then the stock dropped again yesterday on a pretty standard update on its product suite. Oracle's ORCL earnings were another example. This almost 40-year-old company is managing to turn out an impressive high single-digit sales growth, and the stock plunged. Perhaps that's because the shares doubled in the past 11 months?

The spread between the S&P 500's earnings yield and the 2-year yield is the lowest since 2000. That makes stocks far from a bargain, and explains why the market is so attuned to every move in bonds. This morning's inflation print came in slightly warm, and it's likely to get warmer from here thanks to the big move in crude oil prices. This is probably enough to keep yields elevated in the dollar pushing higher -- as long as that happens, the bar for disappointment in stocks will continue to move lower.

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