S&P 500 'Earnings Yield' Is Actually Increasing Since Mid-December '17

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Includes: BXUB, BXUC, CAPX, DHVW, DMRL, EPS, FTA, IVE, IVV, IVW, PPLC, RPG, RPV, RSP, RVRS, RYARX, SDS, SFLA, SH, SPDN, SPLX, SPUU, SPVU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SPYG, SPYV, SSO, UPRO, USMC, VFINX, VOO, VOOG, VOOV
by: Brian Gilmartin, CFA

S&P 500 Earnings Data by the numbers: (Source TR I/B/E/S "This Week in Earnings" dated 1/19/2018)

  • Fwd 4-qtr est: $151.95
  • P.E ratio: 18.5x
  • PEG ratio: 1.29x
  • S&P 500 earnings yield: 5.41% vs. last week's 5.40%
  • Year-over-year growth of forward estimate: +14.31% vs. last week's +13.2%

As the headline suggests, what's unusual about a market that has delivered such a strong rally is that the "S&P 500 earnings yield" has actually risen despite the S&P 500's rally, an indicator of how strong forward earnings estimates have been around tax reform, a strong economy, etc.

The S&P 500 earnings yield is calculated by dividing the "forward 4-quarter estimate" by the S&P 500 closing value for the week, so $151.95 divided by 2,810.30 = 5.41%.

But one would think the powerful rally (i.e. rapidly rising denominator), the earnings yield would start to shrink. Instead because the numerator has risen so rapidly (forward S&P earnings estimates have risen faster than the S&P 500), the S&P 500 earnings yield has actually shown the market getting relatively more attractive using this metric, despite the rally.

Here is the S&P 500 earnings yields trend since mid-December '17:

  • 1/19/2018: 5.41%
  • 1/12/2018: 5.40%
  • 1/05/2018: 5.39%
  • 12/29/2017: 5.34%
  • 12/22/2017: 5.33%
  • 12/15/2017: 5.32%

Expected 2018 earnings growth is way strong.

More to come this weekend.

Thanks for reading...