The inflation-adjusted S&P 500 earnings yield has dropped to 74-year low, and that’s not a good sign for the stock market, says Bank of America.
Recall that earnings yield equals earnings per share divided price per share.
The S&P 500 currently yields negative 2.9% based on real trailing earnings and negative 2.1% on a forward earning basis.
“That means, without continued earnings growth, investors would lose 2.9% adjusted for inflation,” say BofA analysts led by head equity strategist Savita Subramanian. That’s the lowest since 1947.
There only have been four historical instances of negative real earnings yield, all of which resulted in bear markets, they said.
That includes “the post-World War II bear market, the 1970s stagflation era, the 1980s Paul Volcker [interest-rate] shock and the 2000 tech bubble.”
To be sure, “current inflation expectations imply consumer prices moderating to 2.5% over the next 12 months from 6.2% [in October],” BofA said. But that “may prove too optimistic.”
So what does BofA recommend? “Inflation-protected yield: energy, financials and real estate.”
Credit Suisse strikes a more optimistic note on stocks, lifting its 2022 target for the S&P 500 to 5,200 from 5,000. The higher level represents an 11% gain from Wednesday’s close of 4,701.
“This constructive outlook is based on robust projections for economic growth in both real and nominal terms, further margin upside in cyclical groups, a pickup in buybacks and a favorable discount rate, despite Fed tightening,” Credit Suisse’s Chief Equity Strategist Jonathan Golub wrote in a commentary cited by CNBC.