The S&P 500’s yield spread over 10-year Treasuries has hit -1.5 percentage points, the lowest since 2009. Safer government bonds now out-yield stocks on that measure, according to The Kobeissi Letter.
Investors expect stocks to out-yield bonds as compensation for their risk. Instead, Kobeissi says the gap is heading for a third straight negative annual reading, the longest streak since 2002.
What does a negative yield spread actually measure?
The earnings yield divides the S&P 500’s earnings by its price, making it the inverse of the price-to-earnings (P/E) ratio.
Subtracting the 10-year Treasury yield from it gives the equity risk premium (ERP), or yield spread. A positive reading pays investors extra for owning stocks, while a negative one means Treasuries pay more.
Since 2022, the spread has fallen 440 basis points, or 4.4 percentage points. That is the largest five-year drop since the 1970s, according to Kobeissi, a market commentary account on X.
The spread narrows when stock prices rise faster than earnings, or when Treasury yields climb.
Meanwhile, oil-driven inflation and heavy federal borrowing have pushed yields higher. The 10-year touched about 5.36% on Oct. 7, its highest since 2002.
At that yield, a -1.5 point spread implies an earnings yield near 3.9%, or roughly 26 times trailing earnings.
Historically, negative readings have coincided with heavy risk-taking and elevated valuations, Kobeissi notes.
Does a negative premium mean stocks must fall?
Not necessarily. Bloomberg columnist Nir Kaissar found in 2025 that the premium barely predicted returns over one to five years.
However, the link to 10-year returns was stronger, at a 0.51 correlation, suggesting lower premiums precede weaker long-run gains.
In contrast, forward earnings paint a calmer picture, with the S&P 500 near 19 times expected profits, according to FactSet. That equals an earnings yield near 5.3%, roughly level with the 10-year Treasury.
The Kobeissi Letter expects an eventful fourth quarter, though the spread alone cannot time a turning point. With the S&P 500 near records on narrow market breadth, valuations lean on bond yields holding steady.
