Notes on earnings yield

Earnings yield is a financial ratio that describes the relationship of a company’s last twelve months (LTM) earnings per share to the company’s stock price per share. 

In the below figure, the the earnings yield for the S&P 500 is compared with the yield of the 10 year US Treasury bond. Since stocks are riskier assets than bonds you would expect the S&P 500 average earnings yield to be higher than the bond yield and the yield_bond_spread to be positive but from the graph you can see this is not always the case

Earnings yield, is calculated by dividing the earnings per share (EPS) by the current market price per share. The earnings yield is the inverse ratio to the price-to-earnings (P/E) ratio. It shows the percentage of a company’s earnings per share and is used by many investment managers to determine optimal asset allocations and is used by investors to determine which assets seem underpriced or overpriced. 

If you take the example of Alphabet Inc (GOOG)  - it's current price of 322 USD (Dec 5th 2025) and the  earnings per share of the last 12 months (EPS TTM) of 10.15 will give you a earnings yield of 3.15%. For individual stocks, you also need to take the expected growth into consideration since high growth stocks will typically have a lower earnings yield (since growth is calculated in).

You can however use earnings yield to evaluate the overall valuation of a market as a whole e.g. by calculating the earnings yield of the S&P 500  and then comparing it to the 10 year Treasury Bond yield. 

Below graph shows the earnings per share (EPS) on the right y-axis vs the price of  the S&P 500 on the left axis from Macrotrends where you can also download this data. The areas marked in grey on the graph are recessions.

Source: Macrotrends

In the tradingnotebooks repo on my Github you can find a Jupyter notebook which shows how to calculate the earnings yield for the S&P 500 using the downloaded data from Macrotrends.

From 2001 to 2006, you see that earnings yield continuously rise since equity prices were still depressed after the 2002-2002 bear market but corporate earnings recovered steadily. The combination of rising earnings and still moderate stock prices pushed earnings yield higher. 

During the Global Financial Crisis, after the Lehman Brothers bankruptcy in September 2008 earnings collapsed faster than prices as banks wrote down assets, credit froze and the real economy contracted. This caused a massive drop in the S&P 500 earnings yield.

Keep in mind though that price-to-earnings is a very crude valuation metric. Shiller's cyclically adjusted price-to-earnings ratio (CAPE ratio) is widely recognized as a  better valuation tool than the simple price earnings. The CAPE ratio is adjusted for inflation and uses smoothed real earnings to eliminate the fluctuations in net income caused by variations in profit margins over a typical business cycle. Using CAPE will off course require a lot more effort to calculate but in general  earnings yield are a proxy for valuation of the market as a whole and are a strong anchor for long-term results (7-10+ years)

Linked articles:

• P-CAPE: a better way for investors to estimate future returns
• White paper -  earnings yield as an estimate for expected returns (Platinum Asset Management)

Earnings yield: definition, example and how to calculate it.