US Stock Market Investors Are Paying For The Privilege Of Losing Money

US Stock Market Investors Are Paying For The Privilege Of Losing Money
Stéphane Renevier, CFA

almost 2 years ago1 min

A “real earnings yield” is a measure of how much profit a company is making relative to its stock price, adjusted for inflation. The lower that yield is, the less profit you’re getting for the price of the stock you’re buying. And when it dips into negative territory, the profit you’re making isn’t even high enough to offset inflation. So in “real” terms, you’re actually losing money.

Not a great sign, then, that the real earnings yield on US stocks has now dipped to the -4% mark – the lowest it’s been since the 1950s. That’s partly because inflation is so high, sure, but it can’t just be that: inflation was even higher in the ‘70s, after all. No, the culprit in this case is historically sky-high stock prices, combined with inflation that’s outpacing profit growth.

So for the real yield to edge back toward more typical levels, we’d need to see at least one of three things happen: company profits go up, inflation come down, or stock prices come down. Now, profits aren’t likely to go much higher: they’re already so high, and rising interest rates aren’t exactly going to help. Likewise, inflation’s unlikely to fall significantly in the near future: it’s largely been driven by shortages of supply, which are going to take a while to resolve. That leaves a drop in stock prices as most likely in the short term, though there’s no knowing when it’ll happen.

In the meantime, your might want to avoid loading up on stocks altogether. But if you do want to take the plunge, look for companies with a higher earnings yield and strong pricing power. That’ll allow them to pass higher costs to their customers, protecting their bottom lines.

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