Tracking the SP 500 “Earnings Yield”

After the recent slippage in the forward estimate the last few weeks, a couple readers emailed and noted the decline and made some additional comments about the drop the forward estimate, which from a historical perspective, was almost immaterial.

Readers need to be cautioned that SP 500 earnings and the forward estimate is not a “market timing” tool. Typically the stock market peaks 9 – 12 months in advance of a bear market and frequently less time is provided for nasty corrections that may not officially qualify as a “bear market”.

So why track the SP 500 earnings data ? Because – like the old time-tested maxim about betting on the fastest runner winning a race – it’s far from a perfect leading indicator, but it’s a critical statistic that over long time periods provides important information to investors.

SP 500 Earnings data (courtesy Thomson Reuters IBES Earnings Scorecard): 

Fwd 4-qtr est: $163.84

P.E ratio: 16.7x

PEG ratio: 0.78x

SP 500 earnings yield: 5.99% vs last week’s 6.02%

Year-over-year growth of fwd estimate: +21.5% vs +21.4% last week.

Commentary: While readers and pundits fret over the direction and magnitude of changes in the SP 500 earnings, the one metric that has jumped out to me in recent years as a more telling and informative statistic for the benchmark, is the “SP 500 Earnings Yield”.

Still tracking around the 6% area in 2018, the SP 500 earnings yield continues to indicate that there is still a higher probability of the SP 500 generating positive expected future returns than negative returns or experiencing a bear market. (As a matter of math, the SP 500 earnings yield is the inverse of the SP 500 “P.E ratio”.)

When ive written about the SP earnings yield in the past, readers have asked at what level of “earnings yield” would it make sense to be cautious about the overall market valuation, and I’d say once the SP 500 earnings yields starts to trade through 5%, take notice, 4.5% is early warning territory, and 4% – which equates to a 25x P.E ratio on the SP 500 is a point where asset allocations might have to be adjusted materially.

However, readers need to understand that in the late 1990’s and early 2000’s the SP 500 earnings yield was close to 2% – 3%, and endured at these low single-digit levels for a long time. And to make it more complicated, when the SP 500 peaked in October, 2007 near 1,550, the SP 500 earnings yield was over 6%, and we know what happened in late 2007, and well into 2008.

The real lesson for today is never rely on one metric for anything in investing, but like the dashboard on your car, there are certain indicators that can be more “informative” than others.

Perusing the weekly Bespoke Report published Friday night, June 1 ’18, Energy had a heck of an April and May ’18 in terms of sector returns as did small-caps.

The SP 500 is up just 2% year-to-date, but readers are seeing much more volatility than last year.

Midcap and smallcap equity asset classes is where the action is year-to-date. Both mid and small cap are handily outperforming the SP 500.

Both the 10-year Treasury yield and the 30-year Treasury yield have met resistance on the charts at old yield highs, near 3.03% for the 10-year Treasury and 3.22% – 3.25% for the 30-year.

Thanks for reading – more to come Sunday, June 3rd.



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