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Risk-free returns form my biggest concern about the equity market in the current environment. In the U.S, for example, the yield on two-year Treasuries is 5.1 per cent while the forward earnings yield on the S&P 500 (consensus forecast profits for the next fiscal year divided by the current index level) is roughly 5.0 per cent.

So the expected yield on equities and shorter-term bonds is about the same but there is a lot more risk for equities. Investors are faced with the decision of getting a 5.1 per cent return with virtual certainty, or maybe getting the same from stocks.

Equities could, in general, outperform bonds by a wide margin of course but an investor would not know that going in. Also, periods where earnings yields and bond yields are competitive, or bond yields are higher, are those when stocks tend to perform poorly. Barclays head of global strategy Venu Krishna noted in a September 17 report that the current relationship between bond yields and equity valuations “makes it a difficult proposition to own equities at these levels from an asset allocation perspective.”

The outlook for stock investors will brighten if earnings expectations climb or bond yields fall. As for earnings, BofA global quantitative strategist Nigel Tupper found that results are going in the wrong direction. The global earnings revision ratio – the number of companies where analysts raised consensus forecasts divided by those with lowered expectations – declined from 0.90 to 0.78.

This all sounds extremely bearish but it’s only one perspective at one point in time. That said, investors should always track the relationship between bond yields and equity earnings yields for risk management purposes.

-- Scott Barlow, Globe and Mail market strategist

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The Rundown

Why investors are staying put as strikes hit U.S. automakers

The strike by the United Auto Workers union against General Motors, Ford and Stellantis arrives at a time when the Detroit-based car makers are trying to expand their electric vehicle offerings and compete with Tesla. The timing is one thing that is possibly making investors nervous right now. But David Berman points out something that may be reassuring for investors: if recent history is any guide, stocks caught in the middle of a strike are hardly worth abandoning during these bouts of uncertainty.

Demographics, not the Bank of Canada, will drive interest rates higher for longer

Many investors breathed a sigh of relief when the Bank of Canada chose to leave the benchmark lending rate unchanged at 5 per cent at its meeting on Sept. 6. But that hasn’t stopped the speculation as to whether the next move will be up or down, and the timing of that move. There are essentially two camps on this topic: those who believe that the central bank has done enough to slow the economy and that it is time to cut interest rates, versus those who favour keeping interest rates higher for longer in order to ensure that inflation is truly under control. Robert Tattersall, the retired chief investment officer of Mackenzie Investments, is firmly in the higher-for-longer camp. He explains how his view is based on the reversal of a long-term demographic trend known as the dependency ratio.

Also see:

Hedge fund manager Bill Ackman sees U.S. long-term rates rising

Fed hawkishness prompts HSBC to raise 10-year Treasury yield target

Hawkish Fed unwittingly stokes Treasuries ‘basis trade’ risks

Nvidia, other U.S. chip stocks stall over valuation, industry worries

Some of the shine is wearing off shares of Nvidia and other U.S. semi-conductor companies after a stunning 2023 rally, as investors weigh steep valuations, rising Treasury yields and signs of industry unease. Lewis Krauskopf of Reuters reports.

Klaviyo, Arm, Instacart wobble, raising doubts over IPO revival

Marketing automation firm Klaviyo’s (KVYO-N) shares closed well below their first-day high on Wednesday, while a slump in the stocks of Arm Holdings (ARM-Q) and Instacart (CART-Q) added to doubts over whether a hoped-for new-listings revival would materialize. The high-profile listings have put investor focus back on the initial public offering market after a nearly 18-month dry spell. But as Reuters’ Caroline Valetkevitch reports, it may still be a tough time for offerings given high interest rates and recent declines in the broader U.S. stock market.

Hong Kong says it calls the shots, Not Beijing. Investors are wary

Isolated from the world and pulled closer into Beijing’s orbit over the past three years, Hong Kong is finding that its fortunes are tied more than ever to China. The city’s stock market, which is seen as a proxy for China’s economy, is among the world’s worst performing this year. The rivers of money that flowed into companies, minting new wealth, have slowed to a trickle. And there is the gnawing feeling, reports Reuters, that the once-vibrant international city that staked its reputation on being separate from China has become more like the rest of China.

Hyped up uranium investors face political fallout risk

Uranium investors are on a roll, with several prominent uranium-based investment vehicles gaining over 30 per cent already in 2023, and are confident that tight supplies and strong demand will keep the positive momentum going. But even with global uranium consumption set to consistently outstrip supply over the coming years, investors still risk market setbacks tied to the decisions of governments which ultimately have the most decisive say over the long-term outlook for the power source. Gavin Maguire of Reuters reports.

Others (for subscribers)

The highest-yielding stocks on the TSX, plus risk data

Number Cruncher: 18 U.S. stocks for turbulent times

Number Cruncher: 20 funds that outperformed their peers amid interest-rate uncertainty

Friday’s analyst upgrades and downgrades

Thursday’s analyst upgrades and downgrades

Monika Rizk: Bullish on Russel Metals

Globe Advisor

Why this money manager is buying more shares of Premium Brands and trimming Starbucks

Money managers divided on timeline of China’s economic recovery

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Ask Globe Investor

Question: How safe do you think Algonquin Power & Utilities Corp.’s dividend is after the company cut its payout earlier this year? Is the 6-per-cent yield sustainable?

Answer: Maybe. But don’t count on it.

As you may recall, I held Algonquin (AQN) in my model Yield Hog Dividend Growth Portfolio ( until I sold it last November when a dividend cut seemed likely. (I also sold a portion of my personal stake at the time, but I remain a shareholder.) A couple of months later, the company slashed its payout by 40 per cent in an effort to cope with the sharp rise in interest rates.

More recently, Algonquin’s chief executive officer stepped down, and the company put its extensive renewable power assets on the block as it aims to fortify its balance sheet and become a pure-play utility operator.

But even with these moves, the stock has continued to struggle, and the dividend yield has risen to about 6.4 per cent.

In a recent note, RBC Dominion Securities analyst Nelson Ng estimated that in 2025 – assuming Algonquin sells its renewables business and 42-per-cent stake in Atlantica Sustainable Infrastructure (AY) by the end of 2024 – the company will generate about 48 U.S. cents of earnings per share. That would imply an elevated payout ratio of about 90 per cent based on the current annual dividend of 43.4 U.S. cents.

In that case, “there would be no dividend increases for several years” as the company relies on growth in its earnings to bring the payout ratio down to a more conservative level, he said.

“Alternatively, the board and the permanent CEO could right-size (reduce) the dividend to an immediately sustainable level.”

After the resignation of CEO Arun Banskota in August, Algonquin hired board member Christopher Huskilson, a former head of utility Emera Inc. (EMA), as interim CEO. Algonquin’s board is currently looking for a permanent replacement.

There are a lot of variables at play here, including – perhaps most important – the value Algonquin can realize from the sale of its wind, solar and hydro assets.

“Unfortunately, market conditions to sell renewables are not nearly as attractive as they have been over the past several years. Higher interest rates have weighed on the group and limited the price potential buyers are willing to pay,” said Cory O’Krainetz, an analyst with Odlum Brown, in a research note.

Even as the uncertainty is putting downward pressure on Algonquin’s stock price, Mr. O’Krainetz said the shares are trading at “a very attractive valuation, and we are confident that management will improve the business’ performance. The balance sheet has already been strengthened and leverage is likely to be further reduced over time.”

While that may be true, Algonquin is still very much a “show-me” story. Until there is some clarity on the renewables sale, or some definitive signs that interest rates have peaked, I expect the stock will remain in the doldrums and investors will continue to question the sustainability of the elevated yield.

--John Heinzl (E-mail your questions to

What’s up in the days ahead

What is Canada’s most interest-rate sensitive stock? David Berman will attempt an answer.

Click here to see the Globe Investor earnings and economic news calendar.

An inflationary dilemma: World market themes for the week ahead

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

Compiled by Globe Investor Staff

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