S&P’s Earnings Yield vs. High Quality Corporate Bonds

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.

Share

2 thoughts on “S&P’s Earnings Yield vs. High Quality Corporate Bonds

  1. Anonymous

    Very interesting analysis. I especially liked the "spread" at the March 9th low. Seems it could be used as a potential indicator of market lows. Would you happen to have data on what the avantage was for the corporate bonds at the height of our last "irrational exuberance"? It would be worthwhile to see any disparities before the market collapse. Thanks. Keep up the good work!

    Reply
  2. Gregory Speicher

    I do not have this historic data available but I will be looking. I need it for this indicator and to give an historic perspective to a couple other market indicators I track.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *