1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 119
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
The spread between the S&P 500’s earnings yield against sovereign bond yields has narrowed
8%
6%
4%
2%
0%
-2%
-4%
1990
1995
2000
2005
2010
S&P 500 earnings yield - 10 yr U.S. Treasury yield
2015
+1 std.dev
2020
-1 std.dev
2025
Avg.
Source: Bloomberg Finance LP, Scotia Wealth Management
The long-term case for owning equities remains intact
While near-term market outcomes appear increasingly sensitive to valuation assumptions and
macro conditions, the longer-term case for owning equities in diversified portfolios remains
intact. Over extended horizons, equity returns are ultimately anchored in the growth of corporate
earnings, not short-term fluctuations in sentiment or multiples.
Equity market performance is driven by corporate profits
Historical correlation (EPS & index
value)
0.97
0.89
0.91
0.78
S&P 500
S&P/TSX
DAX
MSCI EM
Source: Bloomberg Finance LP, Scotia Wealth Management
Viewed through the lens of our equity risk premium framework, current market pricing implies a
long-term earnings growth rate of approximately 6%. Although this is above the long-run
historical growth rate of nominal GDP, history suggests that corporate earnings have consistently
grown faster than the broader economy, supported by productivity gains, operating leverage,
globalization, capital efficiency, and periods of margin expansion. Over the past 15 years, S&P 500
earnings growth has averaged closer to 8–9%, well above the pace of economic growth. While
past performance is no guarantee of future results, this context indicates that a 6% long-term
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