TIPS Are Flexing: Real Yields Hit 3.35% and Stocks Are Suddenly Sweating Bullets 📉

Long-term Treasury Inflation-Protected Securities are now delivering real returns not seen in two to three decades, according to Jeremy Siegel, reshaping the math behind the case for owning stocks. Siegel, a Wharton School finance professor and chief economist at asset manager WisdomTree, said during a CNBC interview that the 30-year TIPS yield has reached roughly 3.35%, a level last recorded around 2002. "The 30-year has not yielded this much in 20 to 30 years," Siegel said, noting that Treasury yields more broadly have climbed to multi-decade highs.

That yield is compressing the historical cushion that supported equity valuations. Siegel's calculation puts the real return of a market priced at 20 times earnings near 5%, leaving about 1.65 percentage points of compensation for taking stock risk. The 10-year Treasury yield touched 5.33% on Thursday, according to Bloomberg, adding pressure to that gap. Robert Kaplan, a Goldman Sachs vice chairman and former Dallas Fed president, said traders are already demanding a "Warsh premium" — extra yield reflecting uncertainty over the next Federal Reserve chair.

Siegel said the strain is most visible in the narrow leadership of U.S. equities, where the Magnificent 7 mega-cap stocks post profit margins of 50% to 70%, far above the 7% to 10% margins typical of companies outside technology. He said higher borrowing costs are eating a larger share of those thinner non-tech profits, stalling the rotation into broader stocks that marked the first half of the year. In September, roughly 75% of stocks in the S&P 500 declined even as the index edged higher, a split that illustrated the concentration of gains.

Siegel, who had called for a September rate hike, said he expects two more increases this year, even though the Federal Reserve's own projections point to one. He suggested Fed Chair Kevin Warsh could steer colleagues to skip the October meeting, which falls six days before the midterm elections, and instead deliver a half-point hike in December. Fed Vice Chair Philip Jefferson said Thursday that policymakers "may need more time" to judge the next move. If real yields remain near 3%, Siegel argued, stocks will need to deliver stronger earnings to justify their current valuations.