S&P 500 Gain vs Real Earnings Yield





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Inflation continues to be an issue.

One of those issues is how a relatively high inflation rate impacts stock market valuations.

Take the real earnings yield for example.

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.

Conclusion…

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.

Significantly.

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S&P 500 Gain vs Real Earnings Yield

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 2021?

Inflation in 2021 is currently at 6.2%.

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%.