S&P 500 Earnings Yield Remains Elevated - A Good Thing

Apr. 08, 2018 5:30 AM ETSPY, VOO, IVE, SH, SDS, IVV, SSO, SPXU, UPRO, SPXL, RSP, SPXS, VFINX, SPYG, IVW, VOOG, RPG, RPV, SPYV, EPS, VOOV, BXUB, SPLX, FTA, SPUU, BXUC, SFLA-OLD, SPDN, SPXE, SPXT, DHVW, CAPX, PPLC, SPVU, SPXV, RYARX, SPXN, DMRL, YPS, USMC16 Comments

Brian Gilmartin, CFA

9.47K Followers

Here is the chronology of the S&P 500 "Earnings Yield" since the week of February 9th, 2018, when the stock market suffered the volatility crash:

4/6/18: 6.22%
3/30/18: 5.99%
3/23/18: 6.11%
3/16/18: 5.75%
3/9/18: 5.69%
3/2/18: 5.88%
2/23/18: 5.75%
2/16/18: 5.75%
2/9/18: 6.00%

Source: Internal spreadsheet tracking S&P 500 earnings data

The S&P 500's "earnings yield" is higher as of Friday, April 6th, than February 9th, even though the S&P 500 (denominator) is higher since the forward 4-quarter estimate has risen all quarter.

The last time the S&P 500 earnings yield was above 6% was October, November '16 just prior to the presidential election:

11/11/16: 5.93%
11/4/16: 6.05%
10/28/16: 6.07%
10/21/16: 6.03%
10/14/16: 6.06%
10/7/16: 6.01%
9/30/16: 5.77%

Conclusion: In last night's blog post, it was questioned whether Q1 '18 earnings, which start this week with the big banks and other Financials this coming Thursday and Friday, can be a market catalyst and the thought was the Q1 '18 earnings gains are likely in the market already, but given the S&P 500 earnings yield of over 6% this last 9 weeks, the S&P 500 can rally simply because it remains relatively cheaper than it has been since late 2016.

There is a constant litany of "the stock market (i.e. S&P 500) is expensive" heard every week since the March '09 lows, thus it becomes somewhat challenging to remain a longer-term optimist on stock prices.

The high for the S&P 500 on January 26th, 2018, was 2,872.87. The close for the S&P 500 on Friday, April 6th, was 2,656.88 for a loss of 9.3%.

This is still a pretty normal correction and something not seen since Q1 '16, when the S&P 500 corrected roughly 15% from the July '15 high to the February '16 low.

Looking at the "average" S&P 500 earnings yield in the first two months of 2016, when crude oil was falling to $28 and credit spreads had blown out, the "average 8-week yield" was 6.54%, not much more than today.

Remember, the President's tariff battle with China is subject to a 6-month "public consultation" period - nothing is policy yet. This is "posturing/negotiating by headline" right now.

Thanks for reading.

This article was written by

Brian Gilmartin, CFA

9.47K Followers

Brian Gilmartin, is a portfolio manager at Trinity Asset Management, a firm he founded in May, 1995, catering to individual investors and institutions that werent getting the attention and service deserved, from larger firms. Brian started in the business as a fixed-income / credit analyst, with a Chicago broker-dealer, and then worked at Stein Roe & Farnham in Chicago, from 1992 - 1995, before striking out on his own and managing equity and balanced accounts for clients. Brian has a BSBA (Finance) from Xavier University, Cincinnati, Ohio, (1982) and an MBA (Finance) from Loyola University, Chicago, January, 1985. The CFA was awarded in 1994. Brian has been fortunate enough to write for the TheStreet.com from 2000 to 2012, and then the WallStreet AllStars from August 2011, to Spring, 2012. Brian also wrote for Minyanville.com, and has been quoted in numerous publications including the Wall Street Journal.

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