When checking whether a stock or a country's stock market is "cheap" or "expensive," most investors are familiar with popular indicators such as the P/E ratio (price-to-earnings) and P/BV (price-to-book value).
However, during a period when bond markets have regained prominence due to the escalating Middle East conflict pushing bond yields sharply higher worldwide, analysts have increasingly discussed another indicator called the "Market Earning Yield Gap" (MEYG). This metric helps compare "stock returns" to "bond returns" to identify which markets remain worthwhile for investment.
Thairath Money will introduce this indicator, explaining the events driving global bond yields higher and providing an easy-to-understand method for calculating MEYG.
A securities analyst from Kasikorn Securities noted that in the short term, stock markets face pressure from the intensifying Middle East conflict, raising concerns about disruptions to shipping through the Strait of Hormuz. This has pushed Brent crude oil prices above $95 per barrel and driven global bond yields to their highest levels since 2008.
Markets are beginning to view heightened inflation risk as a factor likely to prompt the US Federal Reserve to raise interest rates more quickly this year. Furthermore, Eurozone inflation accelerated to 3.3% in August from 2.9%, increasing the chances that the European Central Bank will also raise rates.
In another analysis, Krungsri Securities assessed that the US-Iran conflict is unlikely to be resolved easily, although the market believes the peak of the conflict may have passed. They also cite the latest CME FedWatch tool indicating a 66.9% probability of a Fed rate hike at the September meeting.
Meanwhile, Phay Securities reported in an analysis that US bond yields for both 2-year and 10-year maturities rose sharply last night. Despite ISM PMI and job openings coming in below expectations, these figures were insufficient to push bond yields down.
Having established that the main current market concern is "rising interest rates" driven by war-induced increases in oil prices and inflation, the question arises: how do higher interest rates relate to stock investment choices? This is where the Market Earning Yield Gap (MEYG) plays a crucial role.
Simply put, MEYG is the difference between the "earnings yield of the stock market"—reflecting corporate profits relative to stock prices and calculated as the inverse of the P/E ratio—and the "10-year government bond yield."
It compares the returns one might expect from stocks against bonds, which typically carry lower risk. This difference serves as a straightforward indicator of the risk premium investors receive by holding stocks instead of bonds, and it is often used as a proxy for the Equity Risk Premium.
A higher MEYG generally indicates that stocks are more attractively valued compared to bonds, as the earnings yield significantly exceeds bond returns. Investors receive a worthwhile "risk premium" relative to the additional risk of holding equities.
Conversely, a low or negative MEYG suggests stock returns are similar to or less than bond yields, prompting investors to prefer safer bonds due to their relative valuation advantage.
This explains why "rising interest rates" or "surging bond yields" are a consistent concern for stock markets: when bond yields climb but corporate earnings do not keep pace, MEYG narrows automatically.
This reduces the relative attractiveness of stocks compared to bonds, which is why bond yield spikes often trigger some institutional investors to shift assets from equities into bonds.
Research from Asia Plus Securities has applied MEYG to compare stock markets worldwide, referencing each country's 10-year bond yields to identify markets still offering a worthwhile risk premium.
Back in early 2026, Thailand's stock market (SET) had a MEYG of 5.3%, surpassing Hong Kong, China, and the Philippines, while the US market showed a negative MEYG from the start of the year, indicating US stocks were overvalued relative to bond yields.
However, the situation has shifted noticeably since then. Asia Plus Securities categorizes global stock markets into three groups based on MEYG changes:
Nonetheless, MEYG is only one tool among many for investment decisions. Investors should consider other fundamental factors before making any investment choices.
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