Inflation continues to be a major concern.
One of those concerns is how a relatively high inflation rate impacts stock market valuations.
For example, take the real earnings yield.
Currently, it is negative.
A rare occurrence.
So how does the stock market perform following a negative real earnings yield?
Today’s chart helps answer that question by presenting seven inflation rate ranges versus the ensuing average S&P 500 12-month gain.
The stock market has, on average, performed better following a relatively high real earnings yield.
In fact, the stock market has tended to perform best folowing a real earnings yield greater than 2%.
For that to happen in the near future, inflation will need to drop.
What is earnings yield?
Earnings yield is earnings divided by price.
What is real earnings yield?
Real earnings yield is earnings yield less the inflation rate.
What is the inflation rate in 2022?
Inflation in 2022 is currently at 7.1%.
What was the highest U.S. inflation rate in history?
The highest U.S. inflation rate since 1948 occurred in March and April of 1980 with a rate of 14.6%.
What was the lowest U.S. inflation rate in history?
The lowest U.S. inflation rate since 1948 occurred in August 1949 and clocked in at -3.0%.