Attached you will find a long term Bloomberg graph showing a very important equities characteristic that usually has significant impact on their overall returns in the future – the Real Earnings Yield. This graph shows aggregate data for the $SPX500.
What is Earnings Yield (EY)? 🤔 EY is calculated by dividing a stock’s EPS by its market price. It is basically the inverse of the commonly used P/E metric. It generally tells you what net earnings per share a company brings you per one unit of price paid for it on the market. It is a great measure of the attractiveness of purchasing a certain stock and lets you assess, if it is underpriced or overpriced. A company with a high EY is usually a one with good future returns prospects (assumed current EY in the future the company will earn you high EPS per single share). This metric is especially usefull for non-dividend stocks (for the ones paying dividend there’s also the Dividend Yield to be considered, while assessing your total future returns on an investment in certain stock). It also allows you to compare equity investements vs. bond investments by copmaring EY with a bonds Yield to Maturity (YTM).
And what is Real Earnings Yield (REY)? Real in economy usually means “adjusted for inflation”. And so is the case here 😊. REY is the EY minus the inflation rate. It shows what your equity holding yields you after taking the rise in nominal prices into account.
And here is where it is getting interesting… As you see on the graph the REY for $SPX500 currently stands at -2% and it’s the lowest level seen in almost 50 years!
Conclusions???
1. Stocks have not been so unattractive for decades, if adjusted for their “purchasing power” measured by the real EPS they make to investors per unit of average stock price on the market.
2. If inflation persists equities might be getting less and less sexy, unless (a) their prices drop or (b) their EPS goes substantially higher to cover up for inflation rate. So corporations need to be delivering good EPS growth going forward (esp in 2022) to justify current valuations and neutralize the inflation impact (my latest view regarding EPS growth expectation can be read here: etoro.tw/3DYhnZG).
3. But hey, what’s the other choice if not equities? Yes, equities have historically been one of the best assets to protect against inflation, but there’s other options too investors like invest in to hedge against it, like real estate and $GOLD for instance. In recent decades it was real estate that surely did best in that respect, apart from equities. And in the most recent history there’s been also a fast-growing debate on whether alternative assets like $BTC (or other cryptos like $ETH) can hedge against persistent rise in prices. I have no answer here and will not take an opinion.
4. Equities REY still look better than bonds Real Yields (measured by 10Y US Treasury yield – inflation) and this equities in a more favourable perspective on relative terms. Eventually there’s a limited amount of investable asset classes.
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Yours, GlobalAlphaS
$SPX500 $DJ30 $GOLD $ETH $BTC
Disclaimers: None of the ideas, views and thoughts presented here shall ever be taken as a recommendation to buy or sell stocks,bonds,FX,commodities or any other financial instruments as stated in REGULATION (EU) No 596/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC or the Polish Act of 10 February 2017 amending the act on trading in financial instruments and some other acts. The article is for educational reasons and purely presents private views of the author, thus the author shall not be held accountable for any losses of a third party resulting from any potential trading activities in any instruments, both specifically or by category of assets. The author uses his best knowledge and data from sources believed to be reliable, but makes no representations as to the accuracy of the data.Full Disclaimers&Liability Limitations page.
