S&P 500 Earnings Yield Vs 10 Year Treasury Chart
Investors often compare the earnings yield of the S&P 500 to the 10-year Treasury yield to determine the relative value of the stock market. The earnings yield is the inverse of the P/E ratio and represents the earnings per share divided by the current stock price. The 10-year Treasury yield is the interest rate on the 10-year US government bond. In this article, we'll explore the historical relationship between the S&P 500 earnings yield and the 10-year Treasury yield and what it means for investors.
The Relationship Between Earnings Yield and Treasury Yield
The earnings yield of the S&P 500 and the 10-year Treasury yield are both important indicators of the health of the US economy. When the earnings yield is high, it indicates that stocks are relatively cheap compared to their earnings. Conversely, when the Treasury yield is high, it indicates that investors are demanding higher yields to lend money to the government.
Historically, the earnings yield of the S&P 500 has been higher than the 10-year Treasury yield. This makes sense because stocks are inherently riskier than government bonds and investors demand a higher return to compensate for that risk. However, there have been times when the two yields have been relatively close or even inverted.
The Historical Relationship
Looking at the historical relationship between the S&P 500 earnings yield and the 10-year Treasury yield, we can see some interesting patterns. In the 1960s and 1970s, the earnings yield was consistently higher than the Treasury yield. This was a time of high inflation and economic uncertainty, which made stocks a more attractive investment than bonds.
In the 1980s and 1990s, the earnings yield and Treasury yield were more closely aligned. This was a time of economic growth and stability, and investors were comfortable with both stocks and bonds. However, in the late 1990s, the earnings yield fell sharply as investors became overly optimistic about the tech bubble. This led to a period of overvaluation in the stock market.
In the early 2000s, the earnings yield and Treasury yield once again diverged as the tech bubble burst and investors fled to safe-haven assets like bonds. The spread between the two yields was highest in the wake of the 2008 financial crisis, when the Federal Reserve cut interest rates to near-zero and investors piled into stocks to chase higher returns.
What Does It Mean for Investors?
So, what does the relationship between the S&P 500 earnings yield and the 10-year Treasury yield mean for investors? Generally, when the earnings yield is higher than the Treasury yield, it indicates that stocks are relatively cheap and may be a good investment opportunity. Conversely, when the Treasury yield is higher than the earnings yield, it may indicate that stocks are overvalued and a market correction could be on the horizon.
However, it's important to remember that the relationship between these two yields is not foolproof. There are many other factors that can impact the stock market, such as geopolitical events, economic indicators, and corporate earnings. Investors should use this relationship as one tool in their investment toolbox, but not rely on it exclusively.
Conclusion
The relationship between the S&P 500 earnings yield and the 10-year Treasury yield is an important indicator of the relative value of the stock market. When the earnings yield is higher than the Treasury yield, it may indicate that stocks are relatively cheap and a good investment opportunity. However, investors should use this relationship as one tool in their investment toolbox and not rely on it exclusively.