Sp 500 Earnings Yield: A Key to Market Valuation

The S&P 500 earnings yield is a crucial metric for understanding market valuation. It's calculated by dividing the total earnings of the S&P 500 by its market capitalization.

A lower earnings yield indicates that investors are willing to pay more for each dollar of earnings, which can be a sign of a bull market. Conversely, a higher earnings yield suggests that investors are less confident in the market.

In times of economic uncertainty, investors often flock to dividend-paying stocks, which can drive down the earnings yield. The S&P 500's earnings yield can also be influenced by changes in interest rates, as investors seek higher returns in a low-yield environment.

As of the latest data, the S&P 500's earnings yield has been steadily declining, indicating a rise in investor confidence.

Curious to learn more? Check out: S&p500 Dividend Yield

The earnings yield gap is a simple comparison between the earnings yield of stocks versus bonds. It's a calculation of how much profit a company made during the last year, divided by the company's stock price.

For example, Alphabet (GOOG) has a price of $177.29 per share, and annualized earnings per share of $6.41. This results in a P/E ratio of 27.64, and an earnings yield of $6.41/$177.29 = ~3.6%.

The earnings yield of the S&P500 is calculated similarly, using aggregate data for the full stock market. As of June 30, 2025, the current S&P500 earnings yield is 3.55%.

Treasury bond yields are reported daily, and the 10-year yield is used in this model, as it aligns well with the investment horizon of many equity investors. As of June 30, 2025, the current 10-year treasury yield is 4.24%.

Here's a comparison of the S&P500 earnings yield and the 10-year treasury yield since 1960:

The long-term average gap between earnings yields on stocks and bonds is +0.26%. This indicates that stocks are generally undervalued compared to bonds.

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The S&P 500 earnings yield is a simple yet powerful metric that can provide valuable insights into the stock market's valuation. It's calculated by dividing the earnings per share by the stock price, and as of June 30, 2025, the S&P 500 earnings yield is 3.55%.

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The earnings yield gap is the difference between the S&P 500 earnings yield and the 10-year US Treasury rate. A positive spread indicates that stocks are relatively undervalued compared to bonds. The long-term average gap between earnings yields on stocks and bonds is +0.26%, and as of June 30, 2025, the current yield gap spread is 0.45 standard deviations below the historical average, indicating equities are Fairly Valued.

The S&P 500 earnings yield has fluctuated over time, ranging from 3.02% on March 31, 2021, to 5.36% on June 30, 2022. Here's a snapshot of the S&P 500 earnings yield over the past two years:

The 10-year US Treasury rate has also fluctuated, currently standing at 4.24% as of June 30, 2025. This rate is used as a benchmark to compare with the S&P 500 earnings yield.

The Fed model is a valuation methodology that recognizes a relationship between the forward earnings yield of the stock market and the 10-year Treasury bond yield to maturity. This relationship is key to understanding the dynamics between stocks and bonds.

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The Fed model compares the expected return measures for each asset: the yield on a stock (E1/PS) and the yield on a bond (YTM). This analysis is done by looking at the difference between the two expected returns, which indicates the magnitude of mispricing between the two assets.

The yield on a stock is the expected earnings over the next 12 months divided by the current stock price, and it's often compared to the bond yield to determine if stocks are undervalued or overvalued. However, this comparison isn't a guarantee that stock prices will go higher.

Edward Yardeni, a financial expert, named the relationship between the bond yield and stock yield the Fed's Stock Valuation Model, and it's been used in practice since the 1960s. This model suggests that the price paid for the riskier cash flows earned from stocks is appropriate when compared to the yield on a bond.

The Fed model evaluates whether the price paid for the riskier cash flows earned from stocks is appropriate by comparing the expected return measures for each asset. A bigger spread between the stock yield and the bond yield indicates that stocks are cheaper relative to bonds.

In the past, the earnings yield of the S&P 500 was particularly appealing relative to short-term rates, especially during the period from 2001 to 2021. This spread was elevated due to the Fed maintaining low rates, especially after the Global Financial Crisis.

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The S&P 500 earnings yield has jumped to 4.69%, its highest print since January 10, '25, and only exceeded by the September 6, '24 print of 4.82%. The forward 4-quarter estimate has fallen to $270.40, down from $270.46 last week and $272.67 to start the quarter.

The forward PE has dropped to 21.34x this week, compared to 22x last week and the high print for the quarter of 22.6 for the week ending 2/14/25. The revenue upside surprise for Q4 '24 earnings is relatively average at +1.2%, while the EPS upside surprise is the third strongest of the last 5 quarters at 6.9%.

High-yield credit spreads have risen to 288 after bottoming at 259 on 1/24/25. The S&P 500 earnings yield ended last week at 4.69%, the highest since last September 6th, '24's 4.82%. The current S&P 500 EPS expected growth rate for calendar '24 is now 12%, a big gain in just a few months.

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Analysts have lowered expected 2025 S&P 500 EPS sector growth rates from 14% to 10.7% in the exact same period, some of which is expected given the increase in Q4 '24 but also tariff unease in the last few months. The tech sector is expecting slower growth in 2025 than was seen in '24, but not by much.

The Atlanta Nowcast's expectation of Q1 '25 GDP growth of -2.4% has sparked "recession" talk by the Street, which might be contributing to the expected slowdown in 2025.

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Earnings Yield is the inverse of the P/E ratio, calculated by dividing earnings per share by the current share price. This is a simple way to determine if a stock is overpriced or underpriced.

The earnings yield gap is a comparison between the earnings yield of stocks and bonds. It's a quick market valuation heuristic that can indicate whether stocks are relatively undervalued or overvalued compared to bonds.

On a similar theme: Per Share of Common Stock

The earnings yield gap is calculated by subtracting the government bond yield from the earnings yield of stocks. A positive spread indicates that stocks are relatively undervalued compared to bonds, while a negative spread suggests the opposite.

The current earnings yield gap is shown in the chart below, and as of June 30, 2025, it's 0.45 standard deviations below the historical average, indicating that stocks are currently fairly valued relative to bonds.

Here's a breakdown of the earnings yield gap:

The earnings yield gap can be a useful tool for investors to gauge the relative value of stocks compared to bonds. However, it's essential to consider other factors, such as market conditions and economic indicators, before making investment decisions.

A stock's earnings yield can be calculated using its price and earnings per share. For example, if a company has earnings per share of $5 and its stock price is $100, the earnings yield is 5%. This means that for every $100 invested, the company generates $5 in annual profits.

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The earnings yield of the S&P 500, as of June 30, 2025, is 3.55%. This is calculated by taking the projected earnings of the S&P 500 over the next 12 months divided by the current price at the time of calculation.

Here's a comparison of the S&P 500 earnings yield and the 10-year treasury yield since 1960:

Note that the S&P 500 earnings yield and the 10-year treasury yield generally tend to move together, but in the short term, there are some pretty large deviations between the two.

The Negative Spread has a disturbing history. Since 1950, it has turned negative 8 times, often preceding significant drawdowns in the market.

These instances are a cause for concern, as they have been linked to substantial losses in equity values. The infamous 1929 multi-decade top is a stark reminder of the potential consequences.

The data suggests that when the Negative Spread appears, the 3-month median S&P 500 forward return is near 0%. This is a far cry from the average returns we're used to seeing.

Stocks typically perform poorly in the 6 to 12 months following such a signal, with negative returns being the norm. The August 1980 example is a case in point, where stocks initially rose but then saw a 26% drawdown.

Expand your knowledge: Net Interest Spread