Cheap Stocks

One way to evaluate stocks and bonds is to compare the earnings yield of the S&P 500 with the yield on the 10-year US Treasury bond.

In total, S&P 500 companies reported after-tax annualized earnings of $716 billion in the second quarter and had a market capitalization of $9.3 trillion. In other words, for every $100 in market value, the companies in the S&P 500 were generating $7.70 in after-tax profits – an “earnings yield” of 7.7%.

Comparing that earnings yield to the 10-year Treasury yield (currently 2.8%) reveals a gap of nearly five percentage points, the largest such gap since the late 1970s.

Today stocks offer an earnings yield that is 2.75X the yield on bonds.  So, by this measure, stocks are considerably more attractive than bonds for long-term investors.

Source: “Unfunded Liabilities and Cheap Stocks” [First Trust Advisors]

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