Widening earnings-bond yield gap may weigh on stock market performance

If bond yields continue to climb, Nifty valuations will have to lower to maintain the gap

The widening gap between bond yield and the earnings yield may weigh on the stock market performance as it makes a case for lower equity valuations.

The sovereign bond yields on Monday breached 7.5 per cent for the first time in three years. The Nifty earnings yield is currently at 4.88 per cent. As a result, the yield gap has swelled to 2.62 per cent, up from 1.97 per cent in February.

Earnings yield is the inverse of the price-to-earnings (P/E) ratio. Therefore, as the P/E ratio expands, earnings yield reduces and vice versa. The lower the yield gap between bonds and