Many investors love to argue over where the best returns will come from—stocks or bonds? Historically, equities have been the go-to for long-term growth, but right now, credit offers a compelling case that’s hard to ignore. In his recent memo, Gimme Credit, Howard Marks makes a strong argument that, at today’s valuations, credit markets offer a better deal than stocks.
For years, investors have relied on the stock market to deliver superior long-term returns, but that assumption is being tested. Marks points out that based on historical price-to-earnings (P/E) ratios, the S&P 500 has historically delivered ten-year returns “averaging between -2% and 2% per year.”
That’s not exactly a strong return profile, especially when compared to what credit markets are offering today.
In fact, this skepticism around stocks isn’t just coming from Marks. As he notes, The Wall Street Journal recently reported, “Stocks haven’t looked this unattractive, by at least one measure, since the aftermath of the dot-com era.”
The reference here isn’t just about high stock valuations, but also about how the yield on the 10-year U.S. Treasury note has surpassed the earnings yield of the S&P 500.
In simpler terms: investors can get paid more for taking less risk by buying bonds instead of stocks.
The case for credit doesn’t stop at Treasurys. Investors who venture into high-yield bonds, senior loans, and private credit can find even more attractive returns. “The current level of offered yields implies higher returns from credit than the S&P 500, with returns that are contractual and thus subject to much less variability and uncertainty,” Marks writes.
The key phrase here is contractual returns. Unlike stocks, where returns depend on growth, sentiment, and market volatility, bonds offer fixed payments with a much clearer risk-reward profile.
Even with today’s tight credit spreads, Marks argues that credit remains the better bet. “Credit isn’t a giveaway today, but it offers healthy absolute returns and is fairly priced in relative terms.”
This isn’t just about traditional corporate bonds either—opportunities exist in mezzanine debt, asset-backed loans, and CLOs.
Of course, the ideal scenario would be for credit spreads to widen and yields to rise even further. But waiting for that perfect setup might not be necessary. “We’d rather buy at higher yields and wider spreads, and we may get a chance to do so . . . or not. But that preference in itself isn’t a reason for not increasing allocations to credit today.”
In other words, the opportunity is already here. Investors who are holding onto equities simply because that’s what has worked in the past may need to rethink their approach. Right now, credit deserves a bigger seat at the table.
You can read the entire memo here:
Howard Marks Memo – Gimme Credit
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