over 2 years ago • 1 min
The profits produced by S&P 500 companies for a given dollar invested has dropped to the lowest level on record, once you adjust for inflation.
As the chart above shows, the so-called real earnings yield has dropped to -2.3%, surpassing the previous low of -2.1% set in 1974. The earnings yield – the amount of profit produced per dollar of stock-market value – is a commonly used valuation metric for stocks. It’s effectively the inverse of the price-to-earnings ratio, but has the advantage of allowing easier comparison with the bond market. A lower earnings yield means a stock or index is more expensive.
The S&P 500’s earnings yield currently stands at 3.9%, up a little from its February low of just 3%. But when you factor in the latest US inflation reading of 6.2%, the “real” earnings yield drops to -2.3%.
In short, the US stock market is currently very expensive, with the rewards paid to investors near their historic lows. And when you factor in the drag caused by inflation, returns are the worst since the S&P 500 was launched in the 1950s.
This historical anomaly can be resolved in three ways: either the US inflation rate falls or company profits climb – or else stock prices fall.
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