While inflation is on the decline, investors are increasingly focusing on earnings.
Today’s chart takes a look at both inflation and corporate earnings in the form of the real earnings yield.
Currently, the real earnings yield 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, earnings will need to at least hold while inflation continues its decline.
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 2023?
Inflation in 2023 is currently at 5.0%.
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%.