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S&P 500 Earnings Yield indicates that Large-Caps are Undervalued
View from the Observation Deck
Earnings yield is the inverse of the price-to-earnings ratio. The calculation is Earnings/Price. The earnings used in the chart are actual, not estimates.
Over the past 50 years, the earnings yield for the S&P 500 has outpaced the core consumer inflation rate (Consumer Price Index excluding; food and energy prices) by an average of 2.4 percentage points.
When the spread is above 2.4 percentage points, equities are usually considered attractive, according to
U.S. News & World Report/Money.
The earnings yield for the S&P 500 closed 2011 at 7.72%, while the core consumer inflation rate finished at 2.20%. The spread was 5.52 percentage points.
Since 1991, the two calendar years with the highest earnings yields (aside from 2011) were 1994 (6.91%) and 2008 (7.24%).
The S&P 500 posted total returns of 34.11% in 1995 and 26.47% in 2009. Keep in mind that
past performance is no guarantee of future results.
Posted on
Thursday, January 19, 2012 @ 4:19 PM
These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.