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In my last blog post, I described how the shifting composition of the US equity market over the past 20 or 30 years has caused the S&P 500 Index to look more and more like a bond every day. Broadly speaking, there is now a far greater percentage of companies with “annuity-like” profits – recurring, scalable, and not capex-heavy to maintain.
This evolution has potentially important implications for the relationship between bond yields and stock prices. In short, I argued, a case can be made that low yields (like today’s) do in fact justify high stock prices (again, like today’s).
The more I think about it, the more sense it makes. After all, with government bonds and other areas of fixed income sporting record-low yields in today’s environment, why wouldn’t income-oriented investors…
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