Rising Treasury yields and Brent crude at $109 are challenging equity valuations, prompting a defensive shift at Berkshire Hathaway as markets price in a 94.5% chance of a September Fed rate hike.
The S&P 500's trailing P/E of 25.9 compares unfavorably to a 5% Treasury yield that implies a 20x multiple, pressuring equity valuations.
Brent crude rose to $109 a barrel, stoking inflation fears and adding to rate-hike expectations.
Berkshire ended Q1 2026 with record cash in short-term Treasuries and continued net equity sales, reflecting defensive positioning.
Goldman Sachs revised its Fed forecast to a 25bp hike and published forward equity risk premium data, but the article does not discuss Goldman's own valuation.
The 10-year Treasury yield's climb to 5% is forcing a market-wide reassessment of equity valuations. Using Warren Buffett's gravity framework, investors are weighing the S&P 500's 25.9 trailing P/E against risk-free bond yields, while Goldman Sachs anticipates a 25-basis-point Fed rate hike amid rising oil prices.
Popularized by Warren Buffett, it compares interest rates to gravity, where rising bond yields pull down equity valuations by increasing the risk-free rate against which stocks are measured.
At a 5% yield, risk-free government bonds offer a 20x earnings multiple, making the S&P 500's trailing P/E of 25.9 look less attractive to investors seeking a premium for equity risk.