Stocks Cheapest In 60 Years (SPX)

An interesting strategist joined the Fast Money crew on CNBC this afternoon and argued that U.S. stocks are at their cheapest levels since 1951. To support this thesis, Michael Darda of MKM Partners compared earnings valuations to corporate bond yields. The S&P 500 (SPX) has a so-called earnings yield of 9.1 percent. The corporate bond yield is 6.1 percent. This 3 percent gap is the largest in six decades. The earnings yield is calculated by taking the inverse of the current market multiple of 11, which is based on trailing four-quarters corporate profit data. This model is similar to the "Fed Model" allegedly used by Alan Greenspan. This model shows corporate balance sheets and earnings power are in astronomically better shape according to bondholders than the equity market believes. So, either stocks are not taking off because earnings are about to fall precipitously or investors are not willing to pay such a high multiple for stocks nowadays.