The earnings yield is often stated as a rough estimate for a stock portfolio's expected return. However, I have seen conflicting evidence on whether or not the earnings yield should be viewed as real or nominal. In theory, the earnings of stocks should grow to keep up with inflation over a long enough time horizon. During ZIRP, it did not matter whether or not the earnings yield was real or nominal as treasury yields were artificially suppressed by the central bank. Therefore, investing in stocks over treasuries was a no-brainer. However, with treasury yields climbing, the distinction between a real or nominal earnings yield is more important. For instance, the current trailing S&P 500 earnings yield is stated as somewhere between 4.00% and 4.25% depending on where you look. The current 10-year treasury yield is 4.79%. If the earnings yield is considered to be nominal, then treasuries seem like the better place to invest at this moment. However, if you add 2.50% inflation to the S&P 500 earnings yield, you end up with an expected return of around 6.50%. Investors then have to decide if the potential "premium" is worth the additional volatility. How do you all view earnings yield? As a real or nominal yield?
Submitted October 07, 2023 at 09:44AM by Agitated_Analyst303 https://ift.tt/1IH9CgM
