Earnings Yield Calculator

Earnings yield and the P/E ratio contain exactly the same information — they are mathematical inverses. A P/E of 20x equals an earnings yield of 5%. A P/E of 25x equals 4%. So why bother with both?

When the P/E ratio works better:

• Comparing stocks to each other — “Stock A trades at 18x and Stock B trades at 30x” is intuitive for most investors. P/E is the more widely quoted metric in equity analysis.
• Screening and filtering — Most screeners and databases use P/E as a standard field. It is the lingua franca of stock valuation.
• Multiples-based valuation — When applying a target P/E to projected earnings, the P/E format is more natural (e.g., “I think this stock should trade at 15x next year's earnings”).

When earnings yield works better:

• Comparing stocks to bonds — This is the primary advantage. You cannot directly compare a P/E of 20x to a bond yield of 4.5%, but you can compare an earnings yield of 5% to a bond yield of 4.5%. Same data, more useful format.
• Asset allocation decisions — When deciding how much to allocate between stocks and bonds, earnings yield lets you compare the two asset classes on the same scale.
• Low and negative P/E stocks — P/E ratios become difficult to interpret when they are very high (e.g., 200x) or negative. An earnings yield of 0.5% or -3% conveys the same information more intuitively.

Rule of thumb: Use P/E for stock-to-stock comparisons and earnings yield for stock-to-bond or stock-to- cash comparisons. Both tell the same story — choose the format that fits the question you are asking.

The Fed Model is a stock-versus-bond valuation framework that compares the S&P 500's earnings yield to the 10-year U.S. Treasury yield. When the earnings yield is higher than the Treasury yield, the model says stocks are relatively cheap. When the Treasury yield is higher, bonds are the better deal.

Origin: The term “Fed Model” was coined by Deutsche Bank strategist Ed Yardeni in the late 1990s after he observed that the Federal Reserve appeared to use this comparison in its Humphrey-Hawkins testimony. The Fed itself has never officially endorsed or used this model, but the name stuck.

How the Fed Model works:

• Step 1: Calculate the S&P 500 earnings yield (total index earnings divided by the index price level). For individual stocks, use EPS / price.
• Step 2: Compare that earnings yield to the current 10-year Treasury note yield.
• Step 3: If the earnings yield exceeds the Treasury yield, stocks are theoretically “cheap” relative to bonds. If the Treasury yield exceeds the earnings yield, bonds offer more income per dollar invested without equity risk.

Historical track record: The Fed Model worked reasonably well from the mid-1980s through the early 2000s when there was a fairly stable relationship between equity and bond yields. However, it has been less reliable since the 2008 financial crisis and the era of quantitative easing, when Treasury yields were pushed to historically low levels by central bank intervention.

Use it as a compass, not a GPS: The Fed Model is best understood as a rough directional indicator of relative value between stocks and bonds. It should inform your thinking, not make your decisions. Pair it with growth expectations, credit spreads, and a DCF model for a more complete picture.

The equity risk premium (ERP) is the extra return that investors demand for owning stocks instead of risk-free government bonds. In the context of this calculator, we compute it as the difference between the stock's earnings yield and the 10-year Treasury yield. A positive ERP means stocks are compensating you for bearing more risk. A negative ERP means bonds are yielding more than what you earn from stock earnings alone.

Why the ERP matters:

• It drives asset allocation — When the ERP is high (say 3-5%), stocks offer a generous premium for taking on equity risk. When it is negative, you can earn more from the safety of government bonds, which shifts the risk-reward calculus.
• It anchors discount rates — In DCF models, the cost of equity is typically the risk-free rate plus the equity risk premium. A higher ERP means a higher discount rate, which means lower present values for future cash flows.
• It signals market sentiment — A shrinking ERP can indicate that investors are becoming complacent about risk (euphoria), while a widening ERP often accompanies fear and uncertainty.
• It varies by market cycle — The ERP was very high during the 2008-2009 financial crisis (stocks were cheap and fear was high) and very low or negative during the late 1990s dot-com bubble (stocks were expensive and euphoria was high).

Historical averages: The long-term historical equity risk premium for U.S. stocks has been around 4-6% when measured by realized excess returns over Treasuries. When the earnings-yield-based ERP falls well below this range, it suggests stocks are relatively expensive. When it is above this range, stocks may be relatively cheap.

Important caveat: The earnings-yield ERP used in this calculator is a simplified, static measure. It does not account for expected earnings growth, which is the key reason investors accept a lower current yield from stocks. Stocks can be a perfectly good investment even with a low or negative ERP if earnings are growing fast enough to overcome the initial yield disadvantage.

Earnings yield is not always the right tool. Like any metric, it shines in certain contexts and misleads in others. Knowing when to rely on it — and when to set it aside — is what separates smart analysis from mechanical screening.

Scenarios where earnings yield is most useful:

• Stocks-versus-bonds allocation — The single most valuable use case. When deciding whether to tilt toward equities or fixed income, comparing earnings yield to bond yields gives you a clear, apples-to-apples picture.
• Mature, stable companies — For companies with predictable, steady earnings (utilities, consumer staples, REITs), earnings yield functions almost like a bond coupon. The metric is highly informative here.
• Market-level valuation — Comparing the S&P 500 earnings yield to the 10-year Treasury yield is a quick way to gauge whether the overall market is cheap or expensive in a historical context.
• Income-oriented portfolios — If your primary goal is yield (income), comparing a stock's earnings yield to bond alternatives helps you determine which asset class offers more income per dollar of capital deployed.
• Value screening — Sorting stocks by earnings yield (highest to lowest) is an effective first pass for finding undervalued opportunities, especially in markets where you have many stocks to compare.

Scenarios where earnings yield is less useful:

• High-growth companies — A stock trading at 50x earnings (2% yield) may look terrible vs. bonds, but if it is growing earnings at 30% per year, the current yield understates its future income potential.
• Cyclical peaks — Earnings yield can be misleadingly high at the top of an earnings cycle. A mining company with temporarily inflated profits might show a 12% yield that disappears when commodity prices drop.
• Companies with negative or volatile earnings — Startups, turnarounds, and cyclically depressed businesses produce meaningless or negative earnings yields.

Best practice: Use earnings yield as a starting point for relative value comparison, then dig deeper with a DCF model to understand whether the current earnings level is sustainable and what the growth trajectory looks like.

The earnings yield and Fed Model comparisons are elegant in their simplicity, but simplicity always comes at a cost. Here are the key limitations every investor should understand.

Core limitations:

• Ignores earnings growth — This is the single biggest weakness. Bonds pay a fixed coupon, while stock earnings (and dividends) can grow over time. Comparing a static earnings yield to a bond yield ignores the fact that next year's earnings yield on your purchase price could be much higher if the company is growing. This is why the Fed Model tends to make stocks look expensive during periods of strong growth.
• Backward-looking earnings — Trailing EPS reflects what the company earned last year, not what it will earn going forward. Using forward EPS estimates partially addresses this, but introduces its own uncertainty since analyst estimates are frequently wrong.
• Inflation distortion — Bond yields contain an inflation premium. When inflation expectations rise, Treasury yields increase, making the Fed Model comparison less meaningful because the higher bond yield does not necessarily mean bonds are “better” — it may just reflect inflation expectations that will also boost nominal stock earnings.
• Central bank distortion — During quantitative easing, Treasury yields were artificially suppressed. The Fed Model consistently showed stocks as “cheap” vs. bonds from 2009 through 2021, which was mostly a reflection of extreme monetary policy rather than genuine relative value.
• EPS quality issues — Earnings can be inflated by share buybacks, accounting choices, or one-time gains. A high earnings yield based on low-quality earnings is a value trap, not a bargain.
• Apples-to-oranges risk comparison — Treasuries are risk-free (in nominal terms). Stocks carry business risk, market risk, and liquidity risk. Comparing their yields as if they are equivalent investments ignores the very real possibility of permanent capital loss in stocks.

What to do about it: Treat the earnings yield and ERP as one data point in a broader toolkit. For a fuller picture, build a DCF model that explicitly projects earnings growth, discounts cash flows at an appropriate rate, and accounts for the specific risks of the company you are analyzing.

The Shiller CAPE (Cyclically Adjusted Price-to-Earnings) ratio, developed by Nobel laureate Robert Shiller, uses 10-year average inflation-adjusted earnings instead of trailing 12-month earnings. The CAPE earnings yield is simply the inverse of the CAPE ratio, expressed as a percentage.

How CAPE earnings yield is calculated:

CAPE Earnings Yield = (1 / Shiller CAPE Ratio) × 100

How it improves on trailing earnings yield:

• Smooths cyclical distortions — By averaging earnings over a full 10-year business cycle, CAPE avoids the problem of trailing earnings being artificially high at the top of a cycle or artificially low at the bottom. This gives a more reliable baseline for valuation.
• Adjusts for inflation — CAPE uses real (inflation-adjusted) earnings, making comparisons across different inflation environments more meaningful. A dollar of earnings in 2024 is not the same as a dollar in 2014 without this adjustment.
• Better long-term predictor — Academic research has shown that the CAPE ratio is a better predictor of subsequent 10-year stock returns than trailing P/E. The CAPE earnings yield therefore provides a more reliable signal for long-term investors making asset allocation decisions.

Limitations of CAPE earnings yield:

• Slow to react — Because it averages 10 years of data, CAPE can be slow to reflect structural changes in profitability. The tech sector's higher profit margins have arguably pushed “fair” CAPE levels higher than historical averages.
• Not useful for individual stocks — CAPE is primarily an index-level metric. Applying 10-year average earnings to individual companies is problematic because company-specific changes (new products, acquisitions, restructuring) make old earnings irrelevant.
• Accounting standard changes — Earnings calculation methods have changed over time (SFAS changes, IFRS adoption), which can distort the 10-year average.

When to use each: Use trailing earnings yield for individual stock analysis and short-term comparisons. Use CAPE earnings yield for market-level valuation and long-term asset allocation decisions.

While the classic application compares stock earnings yield to Treasury yields, the framework extends to virtually any income-producing asset. The core idea is simple: express every asset's return potential as a yield, then compare them on the same scale.

Cross-asset yield comparisons:

• Stocks vs. corporate bonds — Compare the stock earnings yield to corporate bond yields (investment grade or high yield). This tells you whether equities are compensating you enough for the additional risk beyond corporate credit risk.
• Stocks vs. real estate — The cap rate on real estate (net operating income divided by property value) is the real estate equivalent of earnings yield. Comparing the two helps you decide between stock and property investments.
• Domestic vs. international stocks — Comparing earnings yields across markets (e.g., S&P 500 vs. FTSE 100 vs. Nikkei 225) helps identify which country markets offer the most attractive valuations on a yield-adjusted basis.
• Stocks vs. dividend yield — The earnings yield is the total return the company generates per share of equity. The dividend yield is the portion paid out to shareholders. The gap between the two is the reinvestment rate — earnings retained for growth, buybacks, and debt repayment.
• Stocks vs. cash (savings accounts) — When savings accounts yield 5% and a stock earnings yield is 4%, you need to believe in meaningful earnings growth to justify the equity risk. This comparison was particularly relevant during 2023-2024 as high-yield savings accounts offered their highest rates in decades.

Framework for any comparison:

• Express both assets' returns as yields (annual return divided by price or investment cost).
• Calculate the spread (difference in yields).
• Ask: “Is this spread sufficient compensation for the extra risk I am taking?”
• Factor in growth potential for the higher-risk asset — the current yield snapshot may understate total returns if the income stream is growing.

Key takeaway: Earnings yield transforms stock valuation from a stock-market-only metric into a universal language for comparing return across every asset class. The spread between yields, combined with your assessment of growth and risk, drives the allocation decision.