Earnings Yield Favors The Cyclical Sectors

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 |  Includes: SPY
by: David I. Templeton, CFA

Standard & Poor's notes in a recent report on Earnings Yield By Sector that seven of ten S&P 500 sectors have earnings yields greater than their long term averages. As of mid-May, the S&P report notes,

"the earnings yield on the S&P 500 was 5.4% (based on trailing GAAP EPS through Q1 2013), and nearly three times as high as the 1.9% yield on the 10-year Treasury bond. The last time the EPS yield was this far above the 10-year note yield was in 1955....Common wisdom holds that if stocks are yielding a lot (in EPS) relative to bonds (in interest), stocks are more attractive than bonds."

The S&P research report contains an analysis of the historical yield relationship and the subsequent 12-month performance achieved by the Index.

Another interesting aspect of the report is the average sector earnings yield relative to the 10-year Treasury Note. The three sectors that have earnings yields to 10-year Treasury Note multiples that are currently below their average are consumer staples, utilities and telecommunications. These three sectors are ones that have had the strongest performance this year through April 26th as noted in our post, Sector Rotation Underway. Since April 26th though these same three sectors have had the worst performance.

From The Blog of HORAN Capital Advisors
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Some of the sectors with the best performance since April 26th are those that have the highest earnings yield relative to the 10-year Treasury note yield.

From The Blog of HORAN Capital Advisors
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S&P concludes,

"since stocks are yielding nearly three times in EPS what bonds are yielding in interest, history suggests that stocks may be the more attractively valued asset class. And since the cyclical sectors are trading at a higher premium to their normal EPS-to-bond yield multiple than the defensive sectors, the recent rotation into cyclical sectors at the expense of the defensive ones is a trade that appears to us to have some sustainability."

For investors, although stocks appear appear to be a more attractive investment versus bonds, the summer months historically have been a weak period for equities.