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Gross, once known as the bond king, explained that EPS levels and forward assumptions are “only part of the story” and now have a “less significant influence on stock prices than the change in interest rates, which tend to dominate longer-term values.”
The surge in bond yields over the last two years might even cause equity analysts to wonder why stocks aren’t in a bear market, Gross stated.
He is also suspicious of a new bull market occurring, stating that unless the Federal Reserve can significantly lower real 10-year Treasury rates from 2.25%, “investors may eventually realize that bonds are a better deal than clearly overvalued stocks headed into an economic slowdown/recession.”
However, Gross doesn’t believe Powell will be willing or able to lower short rates significantly amid a 3% inflation future.
As a result, he said he would “pass on stocks and bonds in terms of future total returns” and seed the best bets as arbitrage situations that yield annualized returns of 10-20%.
Gross advised investors to keep an eye on real and nominal 10-year Treasury rates, as he believes they need to decline significantly to validate existing forward P/E ratios.
