- There is still no alternative to the stock market despite recent surge in interest rates, Fundstrat's Tom Lee said on Monday.
- Lee highlighted that while the 10-Year US Treasury note yields 2%, the S&P 500's total cash return yield is around 3%.
- "Equities have a yield surpassing that of bonds, so stocks are still attractive," Lee said.
Interest rates surged in recent weeks as investors prepare for rate hikes from the Federal Reserve, but there is still no alternative to buying the stock market, according to Fundstrat's Tom Lee.
While the 10-Year US Treasury yield hit 2% for the first time since 2019 last week on the back of high inflation and expectations for Fed policy action, the S&P 500 still sports a total cash return yield of about 3%, according to Lee. That measurement, which combines dividends with stock buybacks, is one to follow as the hunt for yield by investors continues.
The S&P 500's dividend yield currently sits around 1.3%, while its stock buyback yield is at about 1.75%, according to Fundstrat.
"Equities have a yield surpassing that of bonds, so stocks are still attractive," Lee said, adding that as long as the Fed is raising interest rates, "bonds are guaranteed to lose money."
While the US stock market remains more attractive than fixed income, it also remains more attractive than global stocks, as there is "considerable valuation support for US equities."
When using the same sector weighting as the S&P 500, Europe stock's total cash return yield is 1.3%, Japan's is 2.6%, and emerging market stocks are at 2.8%.
"So why do investors recommend allocating away from the US? The S&P 500 is still the cheapest equity market on this measure," Lee said.
All-in, Lee remains steadfast in his belief that the stock market will see a rally in February, even as investors navigate rising geopolitical tensions between Russia and Ukraine, along with higher interest rates and corporate earnings reports.
"We still see a case for a rally in February... the key factors are the rapid rises of cash, the plunge in sentiment, the waterfall decline in stocks, and the general bearishness of markets," Lee concluded.
