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Stock prices rose last fortnight. The S&P 500, an index of big American companies, climbed another 4% to 4,077 despite inflation-adjusted interest rates increasing. The market continues to rise from its October lows but is still 10% below where it was last year. I value the S&P 500 at 3,941, which suggests it is slightly overvalued.

The companies in the index earned $1,741bn after tax in the past year. They paid out $446bn in dividends, bought back $924bn worth of shares, and issued $70bn of equity.

The forward price-earnings (PE) multiple jumped from 16 to 17 as my 12-month forward earnings per share (EPS) estimate for the index dropped from 243 to 237.

Government bond prices dropped. Yields, which move the opposite way to prices, rose as inflation expectations did. The yield on a ten-year US Treasury bond, a critical variable analysts use to value financial assets, climbed 15 basis points (bp) to 3.5%. Investors expect inflation to average 2.3% over the next decade, up 13bp from the rate they expected last fortnight.

Hence, the real interest rate, the difference between yields and expected inflation, increased by 2bp to 1.3%. These inflation-adjusted rates are up almost two percentage points in the past year.

Corporate bond prices also went down. Credit spreads, the extra return creditors demand to lend to businesses instead of the government, fell by 4bp to 1.6%. The cost of debt, the annual return lenders expect when lending to these companies, jumped 11bp to 5.1%. Refinancing costs have effectively doubled, up 1.9 percentage points, in the past year. But they’ve been declining since they peaked in October above 6%.

The equity risk premium (ERP), the extra return investors demand to buy stocks instead of risk-free bonds, tumbled 51bp to 4.9%. It’s now about the same as it was a year ago. Consequently, the cost of equity, the total annual return these investors expect, fell 36bp to 8.4%. These expected returns are also still roughly in line with the long-term average.