Earnings Yield
Quick Definition
Earnings yield is a company's earnings per share divided by its stock price, expressed as a percentage. It is the inverse of the price-to-earnings (P/E) ratio. If a stock has a P/E of 25, its earnings yield is 4 percent (1 divided by 25). This metric lets you compare the earnings return on a stock to the yield on a bond, savings account, or any other income-producing asset.
What It Means
Earnings yield translates the P/E ratio into a percentage that is directly comparable to interest rates. This is useful because investors constantly face the question: should I put my money in stocks or bonds? Earnings yield answers that question by expressing the stock's earnings return in the same units as a bond yield.
When earnings yield is higher than bond yields, stocks are relatively attractive because you are getting more earnings per dollar invested than you would get in interest from bonds. When earnings yield is lower than bond yields, bonds look more attractive because the income from bonds exceeds the earnings return from stocks.
In August 2026, this comparison was particularly relevant. The S&P 500 trailing earnings yield was approximately 3.4 percent, based on trailing 12-month earnings of about $276 per share and an index level around $7,490, according to Multpl and FactSet data. The forward earnings yield, based on forward 12-month earnings of about $374, was approximately 5.0 percent. Meanwhile, the 10-year Treasury yield was about 4.69 percent. This means the trailing earnings yield (3.4 percent) was below the bond yield (4.69 percent), but the forward earnings yield (5.0 percent) was above it.
This gap between trailing and forward earnings yield reflects the market's expectation of strong earnings growth. Investors are paying a high price relative to current earnings (trailing P/E of about 27) but a more reasonable price relative to expected future earnings (forward P/E of about 20). The earnings yield gap, which compares the forward earnings yield to the 10-year Treasury yield, was approximately negative 0.94 percent as of August 7, 2026, according to Current Market Valuation. This negative gap means bonds yield more than stocks on a forward earnings basis, which historically suggests equities are somewhat expensive relative to bonds.
The long-term average S&P 500 earnings yield is about 6.6 percent (median), with a mean of about 7.2 percent, according to Multpl. The current trailing yield of 3.4 percent is well below this average, reflecting the elevated valuations of the current market. However, strong earnings growth is closing the gap, as forward earnings have risen 24.9 percent year-to-date through August 2026 while the index rose only 12.1 percent.
How It Works
The Formula
Earnings Yield = EPS / Stock Price
Or equivalently:
Earnings Yield = 1 / P/E Ratio
If a stock trades at $100 and has EPS of $5:
- P/E ratio = $100 / $5 = 20
- Earnings yield = $5 / $100 = 5 percent
- Or: 1 / 20 = 5 percent
Trailing vs. Forward Earnings Yield
Just as there are trailing and forward P/E ratios, there are trailing and forward earnings yields:
| Type | Formula | August 2026 S&P 500 |
|---|---|---|
| Trailing earnings yield | Trailing EPS / Current Price | ~3.4% |
| Forward earnings yield | Forward EPS / Current Price | ~5.0% |
The forward earnings yield is generally more useful for investment decisions because it reflects expected future earnings rather than past results. However, forward earnings are estimates and can be wrong. Trailing earnings are facts but may not reflect the current trajectory of the business.
Comparing Stocks to Bonds
The most common use of earnings yield is comparing stocks to bonds. The Fed Model, popularized in the late 1990s, compares the S&P 500 forward earnings yield to the 10-year Treasury yield:
| Scenario | Interpretation |
|---|---|
| Earnings yield > Treasury yield | Stocks are relatively attractive |
| Earnings yield < Treasury yield | Bonds are relatively attractive |
| Earnings yield = Treasury yield | Market is fairly valued |
In August 2026:
Forward earnings yield: ~5.0 percent
10-year Treasury yield: ~4.69 percent
Gap: +0.31 percent (stocks slightly more attractive on a forward basis)
Trailing earnings yield: ~3.4 percent
10-year Treasury yield: ~4.69 percent
Gap: -1.29 percent (bonds more attractive on a trailing basis)
The interpretation depends on which earnings yield you use. The forward yield suggests stocks are slightly more attractive than bonds, while the trailing yield suggests bonds are more attractive. The truth likely lies somewhere in between, since forward earnings estimates can be optimistic.
Earnings Yield by Sector
Different sectors have different earnings yields, reflecting their growth prospects and risk profiles. In August 2026, based on FactSet data:
| Sector | Forward P/E | Forward Earnings Yield |
|---|---|---|
| Energy | 13.1 | 7.6% |
| Financials | 15.5 | 6.5% |
| Materials | 16.0 | 6.3% |
| Utilities | 17.5 | 5.7% |
| Health Care | 18.0 | 5.6% |
| S&P 500 overall | 20.0 | 5.0% |
| Consumer Staples | 20.5 | 4.9% |
| Technology | 22.0 | 4.5% |
| Consumer Discretionary | 24.3 | 4.1% |
| Industrials | 25.2 | 4.0% |
High-growth sectors like technology and consumer discretionary have lower earnings yields (higher P/E ratios) because investors expect earnings to grow rapidly. Defensive sectors like energy and financials have higher earnings yields because their earnings are more stable but grow more slowly.
Real-World Examples
Example 1: Stock vs. Bond Decision
An investor in August 2026 is choosing between buying an S&P 500 index fund and a 10-year Treasury bond:
| Investment | Yield | Risk |
|---|---|---|
| 10-year Treasury | 4.69% | Very low (backed by US government) |
| S&P 500 (forward earnings yield) | 5.0% | High (market can decline 20 to 40 percent) |
| S&P 500 (trailing earnings yield) | 3.4% | High |
The forward earnings yield of 5.0 percent is only slightly above the Treasury yield of 4.69 percent. The investor is taking on significant equity risk for a small premium. However, the earnings yield does not capture earnings growth. If S&P 500 earnings grow 10 percent per year, the total return from stocks would be the earnings yield plus growth, or about 15 percent, which far exceeds the bond yield. The tradeoff is that stock returns are uncertain while bond payments are guaranteed. Read our guide on bonds explained for more on this comparison.
Example 2: Comparing Two Stocks
An investor is comparing two companies:
| Company | Stock Price | EPS | P/E | Earnings Yield |
|---|---|---|---|---|
| Company A (utility) | $80 | $5.50 | 14.5 | 6.9% |
| Company B (tech growth) | $200 | $4.00 | 50.0 | 2.0% |
Company A has a much higher earnings yield (6.9 percent vs. 2.0 percent), meaning you get more earnings per dollar invested. But Company B may be growing earnings at 30 percent per year while Company A grows at 3 percent. If Company B's earnings double in 3 years, its earnings yield rises to 4.0 percent at the same stock price. If Company A's earnings grow 10 percent in 3 years, its earnings yield rises to 7.5 percent. The right choice depends on whether you value current earnings or future growth.
Example 3: The Historical Perspective
The S&P 500 earnings yield has varied dramatically over time:
| Period | Earnings Yield | 10-Year Treasury Yield | Stocks vs. Bonds |
|---|---|---|---|
| 1980 | 13.0% | 12.0% | Stocks slightly ahead |
| 1990 | 6.5% | 8.5% | Bonds ahead |
| 2000 (dot-com peak) | 3.2% | 6.0% | Bonds far ahead |
| 2009 (financial crisis low) | 8.5% | 3.0% | Stocks far ahead |
| 2020 | 4.0% | 0.9% | Stocks far ahead |
| August 2026 (trailing) | 3.4% | 4.69% | Bonds ahead |
| August 2026 (forward) | 5.0% | 4.69% | Stocks slightly ahead |
The best buying opportunities historically came when the earnings yield was well above bond yields, as in 2009. The worst times to buy were when the earnings yield was far below bond yields, as in 2000 during the dot-com bubble. The current situation is mixed: trailing earnings yield suggests caution, but forward earnings yield suggests stocks are still reasonably priced relative to bonds. Read our guide on how the stock market actually works for more on market valuation.
Key Points to Remember
- Earnings yield is EPS divided by stock price, or 1 divided by the P/E ratio. It expresses the earnings return on a stock as a percentage.
- In August 2026, the S&P 500 trailing earnings yield was about 3.4 percent and the forward earnings yield was about 5.0 percent. The 10-year Treasury yield was about 4.69 percent.
- The long-term average S&P 500 earnings yield is about 6.6 percent. The current trailing yield of 3.4 percent is well below average, reflecting elevated market valuations.
- Forward earnings yield is more useful than trailing for investment decisions, but it depends on analyst estimates that can be wrong.
- Different sectors have very different earnings yields. Energy and financials have high yields (low P/E), while technology and consumer discretionary have low yields (high P/E).
- Earnings yield does not capture earnings growth. A stock with a low earnings yield can still be a good investment if earnings are growing rapidly.
Common Mistakes to Avoid
- Confusing earnings yield with dividend yield: Earnings yield measures total earnings relative to price. Dividend yield measures only the portion of earnings paid out as dividends. A company can have a high earnings yield but pay no dividend, reinvesting all earnings into the business.
- Ignoring earnings growth: Earnings yield is a snapshot. A stock with a 2 percent earnings yield and 30 percent earnings growth may deliver better returns than a stock with a 7 percent earnings yield and no growth. Always consider growth alongside yield.
- Using trailing earnings yield in a rapidly changing market: Trailing earnings reflect the past 12 months. If earnings are growing or declining rapidly, trailing yield can be misleading. Use forward earnings yield when earnings are changing quickly.
- Assuming the Fed Model is perfect: Comparing earnings yield to bond yields is a useful framework, but it has limitations. Bond yields are guaranteed while earnings are not. Stock prices can decline even when earnings yield exceeds bond yields. The model also ignores earnings growth, which is a major component of stock returns.
- Comparing earnings yields across sectors without context: A 4 percent earnings yield in a high-growth tech company may be more attractive than a 7 percent yield in a declining industry. Always consider the business trajectory, not just the current yield.
- Forgetting that earnings can be manipulated: Earnings yield is only as reliable as the earnings figure behind it. Companies can inflate earnings through accounting choices, non-GAAP adjustments, or one-time gains. Check free cash flow yield as a cross-reference. Read our guide on common investing mistakes.
Related Concepts
Earnings yield is the inverse of the P/E ratio and is calculated from earnings per share (EPS). It is related to dividend yield, which measures only the dividend portion of earnings. It is used in valuation to compare stocks to bonds and is a tool of fundamental analysis. The S&P 500 earnings yield is a common market valuation indicator. Free cash flow yield is a cash-based alternative that some investors prefer. Read our guides on how the stock market actually works, bonds explained, the S&P 500 index fund explained, and when to sell a stock. Use our investment return calculator to model your portfolio returns.
Frequently Asked Questions
Q: What is the difference between earnings yield and dividend yield? A: Earnings yield is total EPS divided by stock price. Dividend yield is only the dividend per share divided by stock price. A company with a 5 percent earnings yield and a 40 percent payout ratio would have a dividend yield of 2 percent. The remaining 3 percent of earnings is reinvested in the business or used for buybacks.
Q: Is the S&P 500 overvalued based on earnings yield in 2026? A: The trailing earnings yield of 3.4 percent is well below the historical average of 6.6 percent, suggesting elevated valuations. However, the forward earnings yield of 5.0 percent is closer to the 10-year Treasury yield of 4.69 percent, suggesting stocks are reasonably priced relative to bonds on a forward basis. Whether the market is overvalued depends on whether forward earnings estimates are achieved.
Q: Should I buy stocks when earnings yield is below bond yields? A: Not necessarily. Earnings yield does not capture earnings growth. If earnings are growing at 15 percent per year, the total expected return from stocks is the earnings yield plus growth, which can exceed bond yields even when the current earnings yield is lower. However, a persistently low earnings yield relative to bonds is a warning sign that stock valuations are stretched.
Q: How do I calculate earnings yield for a specific stock? A: Divide the company's EPS by its current stock price. For example, if a stock trades at $150 and has trailing EPS of $7.50, the trailing earnings yield is $7.50 / $150 = 5.0 percent. You can also use forward EPS estimates to calculate forward earnings yield. The SEC's EDGAR database provides EPS data from company filings.
Q: What is a good earnings yield? A: It depends on the context. For the overall market, an earnings yield above the 10-year Treasury yield is generally considered attractive. As of August 2026, the forward S&P 500 earnings yield of 5.0 percent was slightly above the 4.69 percent Treasury yield. For individual stocks, compare the earnings yield to the company's growth rate, risk level, and sector peers rather than using a single threshold.
