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A Historic Market Flip: The Inversion of Forward Earnings Yield and Treasury Yields

Writer's picture: Ellie PerlmanEllie Perlman

paper showing treasuries

Recently, for the first time in over 20 years, the forward earnings yield on the S&P 500 fell below the 10-year U.S. Treasury yield. This marks a significant turning point in capital markets, as it signals a fundamental shift in the risk-reward tradeoff between equities and fixed income. Historically, equities have offered a premium over Treasuries due to their higher expected returns and associated risk. This inversion now challenges that assumption and necessitates a reevaluation of asset allocation strategies.


In financial markets, one of the key valuation metrics used to assess equities is the forward earnings yield, which is calculated as:


This metric is the inverse of the price-to-earnings (P/E) ratio and represents the implied return an investor would receive from earnings relative to the stock price. A higher forward earnings yield suggests that stocks are priced attractively relative to their earnings potential, while a lower yield implies that stocks may be expensive or that earnings growth expectations are weak.


On the other hand, the 10-year Treasury yield represents the return an investor receives from holding U.S. government debt for ten years. As a benchmark for risk-free rates, it plays a critical role in discounting future cash flows and setting the baseline for required returns across all asset classes.


Historically, the forward earnings yield on the S&P 500 has been higher than the 10-year Treasury yield, justifying the equity risk premium and making stocks an attractive long-term investment relative to bonds. However, recently, this relationship flipped, marking a critical shift in market sentiment and valuation frameworks.


2025 US Multifamily Outlook Report

Why Has This Happened?


Several factors have contributed to this inversion:


  1. Equity Valuations Have Remained Elevated:
    • Stocks, particularly in the technology sector, have maintained high valuations despite rising interest rates.

    • Passive investment inflows and momentum-driven markets have sustained inflated price levels.

  2. Treasury Yields Have Increased Sharply:
    • The Federal Reserve’s monetary tightening cycle has driven Treasury yields higher, making fixed income more attractive.

    • Investors now require a higher return on risk-free assets, impacting equity valuations.

  3. Earnings Growth Has Slowed:
    • Corporate profit margins are under pressure due to rising costs.

    • The economy is exhibiting signs of decelerating growth, affecting forward earnings projections.


What This Means for Alternative Assets


Despite the challenges this presents to traditional equity investing, alternative assets—particularly real estate—stand to benefit from this macroeconomic shift.


1. Private Real Estate Gains Favor Over Public Equities
  • With the equity risk premium shrinking, investors may reallocate capital into private real estate, which offers tangible, income-producing assets that are less correlated to public market volatility.

  • The illiquidity premium associated with private real estate investment enhances long-term return potential, particularly in periods of financial market stress.

  • Capitalization rates (cap rates) in real estate tend to adjust more gradually than public market valuations, providing a more stable return profile.


2. Cost of Debt Rises, But Cap Rates Adjust Accordingly
  • The increase in Treasury yields has led to a corresponding rise in real estate debt costs, requiring a recalibration of underwriting models to factor in higher financing expenses.

  • Investors deploying floating-rate debt structures need to incorporate hedging strategies such as interest rate swaps or caps to mitigate rate volatility.

  • Cap rates are expected to expand, providing opportunistic investors with a chance to acquire distressed or repriced assets at more favorable valuations.


3. Private Credit and Alternative Lending Markets Expand
  • With traditional banks tightening lending standards, private credit funds have increased their market share in financing real estate transactions.

  • The growth of debt funds, structured finance vehicles, and mezzanine lending allows real estate investors to access alternative sources of capital with flexible terms.

  • Structured finance, including preferred equity and bridge loans, has become a key tool for deal structuring, offering a hybrid between traditional debt and equity financing.


4. Inflation Protection and Hard Asset Demand Remain Strong
  • Real estate remains an effective inflation hedge, as property income streams—particularly in sectors like multifamily, industrial, and self-storage—are often indexed to inflation.

  • Infrastructure investments, such as toll roads, energy assets, and logistics hubs, continue to attract capital due to their long-duration cash flows and contractual revenue escalations.

  • Institutional investors, including pension funds and insurance companies, are increasing allocations to real assets as a defensive play against inflation and currency debasement.


A Secular Tailwind for Alternative Investments


The inversion of the forward earnings yield relative to the 10-year Treasury yield represents a structural shift in asset allocation. While traditional equity markets face valuation headwinds, alternative assets—particularly private real estate, private credit, and infrastructure—stand to benefit from investors seeking yield, inflation protection, and portfolio diversification.


For real estate private equity firms, this environment presents a unique opportunity. Firms that can adapt to the evolving cost of capital, leverage private credit relationships, and focus on resilient asset classes like multifamily, industrial, and logistics will be well-positioned to deliver strong risk-adjusted returns in the coming years.


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P.S. If one of your priorities, like mine, is building and preserving your wealth through multifamily real estate investments, click here to download my new eBook: The Ultimate Guide to Creating & Preserving Your Wealth.

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About Ellie Perlman


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Ellie Perlman is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.


A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.


Ellie is the founding host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.


She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.


Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.


You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.


*The content provided on this website, including all downloadable resources, is for informational purposes only and should not be interpreted as financial advice. Furthermore, this material does not constitute an offer to sell or a solicitation of an offer to buy any securities.

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