Treasury yields outpace stocks as equity risk premium falls to -1.5%

The gap between what the S&P 500 earns and what 10-year Treasuries yield has fallen to -1.5 percentage points, marking its lowest level since 2009. According to The Kobeissi Letter, less risky government debt now offers a higher return than equities when measured this way.

Typically, investors anticipate that equities will offer higher returns than bonds to offset their greater risk. However, Kobeissi notes that the spread is on track for a third consecutive negative year, the longest such run since 2002.

What does a negative yield spread actually measure?

The earnings yield is calculated by dividing the S&P 500's earnings by its price; it is the reciprocal of the price-to-earnings ratio.

Subtracting the 10-year Treasury yield from the earnings yield yields the equity risk premium (ERP), also known as the yield spread. A positive figure indicates that investors earn a premium for holding stocks, while a negative one suggests that Treasuries offer a better return.

Since 2022, the spread has declined by 440 basis points (4.4 percentage points). Kobeissi, a market commentary account on X, reports that this represents the largest five-year decline since the 1970s.

We are witnessing a historic shift.

The annual spread between the S&P 500's earnings yield and the 10Y Note yield is down to -1.5 percentage points, its lowest since 2009.

Since 2022, this yield difference has fallen -440 basis points, its largest 5-year decline since the… pic.twitter.com/eHNWe0Qdkc

— The Kobeissi Letter (@KobeissiLetter) October 13, 2026

The spread decreases when stock prices increase more quickly than earnings, or when yields on Treasuries rise.

At the same time, oil-driven inflation and substantial federal borrowing have driven yields up. The 10-year Treasury yield reached approximately 5.36% on October 7, a high not seen since 2002.

With that yield, a spread of -1.5 points suggests an earnings yield of about 3.9%, which is roughly 26 times trailing earnings.

Kobeissi points out that in the past, negative readings have accompanied periods of high risk-taking and elevated valuations.

Does a negative premium mean stocks must fall?

Not at all. In 2025, Bloomberg columnist Nir Kaissar discovered that the premium had little predictive power for returns over one to five years.

However, the connection to 10-year returns was more robust, with a correlation of 0.51, indicating that lower premiums tend to precede weaker long-term gains.

In contrast, forward earnings present a more balanced outlook: the S&P 500 is at about 19 times expected profits, according to FactSet. This translates to an earnings yield of around 5.3%, almost even with the 10-year Treasury yield.

The Kobeissi Letter anticipates a volatile fourth quarter, but notes that the spread by itself cannot signal a turning point. As the S&P 500 hovers near record levels with narrow market breadth, valuations depend on bond yields remaining stable.