In my blog yesterday entitled “How Cheap are U.S. Stocks?”, I compared the the 5-year average earnings yield of the S&P 500 with the yield of the 10 year U.S. Treasury. I then compared the ratio of these two yields to that of past bear market lows. Based on this metric, U.S. stocks look to be still priced attractively.
Today, I want to compare the the 5-year average earnings yield of the S&P 500 with the yield of 10 year AA corporate bonds. This is a meaningful comparison because investors have a choice between equities and bonds. If they can obtain a yield in high-quality corporate bonds that equals that of equities, it may put downward pressure on stocks.
As of July 23, 2009, the yield on 10 year AA corporate bonds was 4.9% compared with a 6.6% yield for the S&P 500, based on yesterday’s close. This gives the S&P an advantage of 1.7%. The advantage was 5.23% at the March 9, 2009 stock market low.
Here is a spreadsheet of the data I used.