stocks
Data Source for Returns Data: Yahoo
Data Source for Earnings Yield: Vanguard, ETF.com, Barron’s, FullRatio.com
The stock market increased by 10% in the second quarter.
What is most interesting about the above table is the correlation between first-half performance and earnings yield.
The three best performing categories (the international stocks in green) had the three highest earnings yields.
The three worst performing categories (the small caps in yellow) had the three lowest earnings yields.
The U.S. stock market experienced an 18.9% correction year which bottomed out in the second quarter.
The quick and powerful correction caused dozens of reliable price and sentiment-based indicators to give off signals. These signals were unambiguous in their message – the stock market was going to go up.
But the United States stock market is extremely expensive by wide variety of historical measures. For example, both the U.S. stock market dividend yield and peak earnings yield are at the bottom 2.0% percentile of their historical range.
So, we have two powerful forces pulling on the opposite end of a rope in a sixty-trillion-dollar game of tug-of-war.
Bullish Quantitative Indicators vs. Bearish Valuation
How will this be rectified?
One interesting analog may offer a clue.
In July 1998 the stock market was highly overvalued. The S&P 500’s earnings yield was 3.34%, its peak earnings yield was 3.51% and its dividend yield was 1.38%.
In February 2025 the stock market was highly overvalued. The S&P 500’s earnings yield was 3.61%, its peak earnings yield was 3.61% and its dividend yield was 1.27%.
In July 1998, stocks started a 19.3% correction which lasted 45 days.
In February 2025, stocks started an 18.9% correction which lasted 48 days.
After bottoming in 1998, stocks went up 60% over the next 1.5 years.
But after the 60% rally, stocks suffered through a 49% bear market.
debt
One of the biggest fixed income stories in the second quarter was that the Japanese Bond Market was “crashing”. Most of these stories were centered around the 30-year or 40-year bond. Here is a chart of the 30-year Japanese Government Bond (JGB) yield.
Data Source: CNBC
On a surface level, it would appear there is something to the hype. It looks like the recent yield for the Japanese 30-year government bond is the highest in history.
The problem is history for the 30-year Japanese Government Bond started in 1999. That isn’t much data for bonds.
For perspective, the most recent U.S. interest rate cycle lasted 74 years (1946-2020).
Let’s look at yields for the 10-year JGB which has an additional 10 years of history.
Or we can compare Japan’s 10-year bond yields to other countries:
Data Source: Trading Economics
The United States bond market is going through a similar situation in terms of getting a fair amount of bad press. There has been a lot of talk about rising interest rates here as well.
And interest rates HAVE gone up from their 2020 bottom.
But interest rates aren’t even that close to their historical average yield of 6.19%
So, in both Japan and the U.S., bond yields are indeed rising. But if you look at the longer-term picture, all this talk about “high interest rates” seems a bit overdone.
Real Estate
Let’s say a condo is deemed to have a fair market value of $100,000. The current owner of the condo has rented the condo over the last 12 months and collected $24,000. But the owner had to pay $19,370 in maintenance fees, taxes and other expenses. Therefore, the owner made a profit of $4,630 over the last 12 months.
That’s a 4.63% cap rate.
According to NCREIF, 4.63% is the average cap rate in the United States commercial real estate market.
This is a low cap rate compared to its historical average of 6.72% since the data’s 1978 inception.
Accordingly, the CME Metro Area Housing Index Futures market is implying a 0.83% annualized return in real estate prices over the next 4.5 years.
Other data is more concerning.
Source: Zero Hedge
Housing affordability is even lower than it was at the peak before the great real estate crash.
Due to more stringent lending requirements now relative to 2005, a period of flattish returns seems more likely than another epic crash.
But buying real estate does not look as attractive as it did in 2012-2013.
Commodities
Here is a long-term chart of the CRB Commodity Index:
Data Source: goldchartsrus.com
The 1972-1977 commodity market is similar to the 2020-2025 commodity market.
A big move up followed by a few years of churning.
The mid-1970’s churn was followed by the final leg up of the bull market.
This analog fits in rather nicely with our theory of the stock market going up for a while, then down.
Because if commodities go up a lot, then chances are oil will go up a lot as well.
And oil price spikes often lead to recessions.
Source: Market Ear
And recessions often lead to bear markets.
Oil spikes preceded the 1973-1974 bear market in stocks, the 1980-1982 bear, the 2000-2002 bear, the 2007-2009 bear and the 2022 bear.
In three of those bear markets, stocks went down at least 48%
gold to oil ratio
We have written about the gold to oil ratio before. The gold to oil ratio is the top part of the chart below.
Data Source: goldchartsrus.com
The bottom part of the chart is something new. It is a quantitative indicator. In the past, when the red indicator line approached the horizontal blue line (which is where the red indicator line was recently), a multi-year period of gold underperforming oil immediately followed.
As oil already has gone up 31% from its May low, it is quite possible the change in leadership is already well underway.
If so, a lot of investors are going to be caught unprepared.
Energy ETFs are only about a half a percent of all ETFs.
The only time this happened (in 2020) oil stocks quadrupled in about 2.5 years.
Based on dozens of quantitative indicators, the equity markets look like they have a lot more room to run. The big winners this year have been stocks which have a high earnings yield. Our proprietary model portfolios have a 9.48% earnings yield. This is highly likely to be one of the highest earnings yields in the U.S. money management business.
Our 3D Universal Asset Allocation strategy incorporates our managed equity models with leading private funds across the private equity, private infrastructure, private credit, venture, real estate, and hedge fund space. Essentially, a strategy that institutional investors have been using for decades is now obtainable for our multi-family office clients.
We invite you to reach out and schedule a call if you would like to learn more.