CROSS-SECTORSECTOR COMMENT 10 NOVEMBER 2015ANALYST CONTACTSBenjamin S. Garber 212-553-4732 Asst Dir-Economist benjamin.garber@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research, Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products. For further detail, please see the last page.Market CommentCorporate Credit Gains Value Relative to Equities US stocks have rallied substantially since the third-quarter upheaval, limiting the opportunity for further gains in a challenging environment for profits. Dollar strength remains an ongoing drain on corporate income, while the relentless surge in buybacks will produce diminishing returns in lifting earnings per share. Without a strong surge in profits in the quarters ahead, the yield on offer from corporate credit becomes increasingly attractive. Elevated spreads make medium grade debt particularly alluring, provided any rise in defaults is contained.MOODY'S ANALYTICS CROSS-SECTOR2 10 NOVEMBER 2015 MARKET COMMENT : CORPORATE CREDIT GAINS VALUE RELATIVE TO EQUITIESStocks are priced for a substantial profit rebound Emerging market growth concerns contributed to a very rough third quarter for the US capital markets, yet the performance of recent weeks has erased much of the damage. The S&P 500 is now up 12.6% from this years low set in August and trails the record high by just 1.3%. But based on the energy-sector led weakness in corporate profits this year, the latest climb in stock prices appears overly aggressive. The earnings yield on the S&P 500, which measures the past years corporate income as a percent of the share price, fell to the six-year low of 4.5% against the current index level (Figure 1). During the previous economic expansion, the earnings yield fell to a then four-year low of 4.5% in Q4 2007which was the initial quarter of the last recession. For continued stock price gains, 2016 must see a turnaround in industrial sector demand that boosts corporate income.In this spa...
