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