S&P 500 Earnings Yield: A Little Fed Model History

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Includes: BXUB, BXUC, EPS, IVV, LLSP, RSP, RWL, RYARX, SDS, SFLA, SH, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SSO, TALL, UPRO, VFINX, VOO
by: Brian Gilmartin, CFA

Way back in late 1999 and early 2000, the S&P 500 earnings yield on the S&P 500 was roughly 3.3%, using the 1999 actual EPS of the S&P 500 of roughly $50 per share, and an S&P 500 value of 1,500.

The thing was that the yield on the 10-year Treasury in late 1999, early 2000 was roughly 6.6%. The highest yield the 10-year Treasury seen after that was roughly 5% in 2006, and then again in early 2007.

Fed Model groupies know where I'm headed with this.

Today, the S&P 500 earnings yield (using today's closing value on the S&P 500 of 2,361) is 5.68%, with the close today on the 10-year Treasury yield of 2.40%.

After peaking out last fall between 6.01% and 6.05%, from October 1, '16 through November 4 '16, the S&P 500 earnings yield has steadily declined to this week's 5.68%.

The highest "earnings yield" recorded that I can recall, is 8.5% in June, 2012. That was near the point of the Greek Debt Crisis (The Greeks were within a few weeks of an "austerity-or-socialism" election choice, and about the time that 10-year Treasury yield was making its first record low at 1.39%.)

In June, 2012, difference between the S&P 500 earnings yield and the 10-year Treasury note was a whopping 700 bps. Today the Fed Model spread is 327 basis points. Certainly much narrower, but nowhere near the inversion from the late 1990's, early 2000's.

Frankly, the 327 basis point surprised me a little bit - I thought it would be a little wider.

Analysis/conclusion: Tomorrow, you can find the weekly S&P 500 Earnings update here on this blog, but - for whatever reason - I've been thinking about the S&P 500 earnings yield recently. The surprise this year - given tax reform - is that the S&P 500 earnings estimate could get a nice boost from said reform, and thus it will be interesting to watch the change in the forward estimate and tax reform once President Trump lays out his tax plan expectations next week.

From a -330 basis point inversion in the late 1990's to a plus 700 basis point premium in June, 2012, tracking the Fed Model spread can be informative.

The 327 basis point positive spread today should tell readers stocks are still cheap to bonds, but certainly that valuation difference has narrowed.

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Tagged: , Earnings, Market News Article
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