Earnings yield
ValuationDefinition
The inverse of P/E ratio, expressed as a percentage. A P/E of 20 is an earnings yield of 5% — what shareholders would receive each year if all earnings were paid out as dividends.
Useful for comparing equities to bonds. The "Fed model" compares S&P 500 earnings yield to the 10Y Treasury yield: equities cheap when earnings yield > Treasury yield. Has weak predictive power historically — popular but flawed.
Useful for comparing equities to bonds. The "Fed model" compares S&P 500 earnings yield to the 10Y Treasury yield: equities cheap when earnings yield > Treasury yield. Has weak predictive power historically — popular but flawed.
Formula
Earnings yield = EPS / Price = 1 / P/E
Example
S&P 500 P/E = 22 → earnings yield = 4.5%. 10Y Treasury = 4.0%. Spread = 50 bps. Tightest equity-vs-bond spread since 2002 — equities priced rich vs. bonds.