What's the right value to put on stocks in a world of disappearing interest rates, where investors in the most sophisticated markets are effectively paying governments to store their electronic cash for a few years?
This is the knotty question for equity markets right now, and convincing answers are elusive.
In general, low interest rates enable and explain higher stock values: Companies can borrow more cheaply, investors have fewer choices to find high potential returns and the long stream of corporate dividends and earnings bought with every share of stock is worth more today when discounted at a lower interest rate.
But would-be stock investors' compasses are starting to spin at a time when some $10 trillion in government debt in Europe and Japan trade at negative yields and U.S. 10-year Treasury yields drag to 1.64 percent — not far above multi-decade lows around 1.5 percent set in 2012.
Asked how he would affix an appropriate price-to-earnings ratio on stocks in this environment, Jason Trennert, chief investment strategist at Strategas Research Partners, said: "It's very tough with interest rates this low to know what the right multiple should be. Our econometric models spit out something like 21 times earnings at these interest rates. You almost get into existential questions — what's the [net present value] of a series of cash flows you discount by negative interest rates?"