Earnings yield is a company's or index's earnings per share divided by its price, expressed as a percentage — the inverse of the price-to-earnings ratio. It states the accounting earnings generated per dollar of market value and serves as an equity analogue to a bond's yield.
How it works
Earnings yield = EPS / price = 1 / (P/E). Trailing versions use realised earnings; forward versions use expected earnings. Comparing the earnings yield to a real or nominal bond yield (the "Fed model" intuition) gauges relative valuation between equities and fixed income.
Why it matters now
With Treasury yields elevated in the 2025-2026 higher-for-longer regime, a compressed equity earnings yield narrows the equity risk premium, sharpening scrutiny of whether megacap multiples are justified by earnings growth rather than re-rating.
Example
A briefing combined roughly 12% EPS growth with a 5.8% earnings yield to imply a ~17.8% expected return — decomposing total return into the cash-flow yield (5.8%) plus growth (12%). A 5.8% earnings yield corresponds to a P/E of about 17.2x (1 / 0.058).
Frequently asked
- What is earnings yield?
- Earnings yield is earnings per share divided by price, the inverse of the price-to-earnings ratio, expressed as a percentage. A stock trading at 20x earnings has a 5% earnings yield (1/20). It states accounting earnings generated per dollar of market value, letting analysts compare equities to bond yields on a like-for-like cash-return basis.
- How does earnings yield differ from dividend yield?
- Earnings yield uses total earnings per share, while dividend yield counts only the portion of earnings paid out as cash dividends. Earnings yield is always equal to or higher than dividend yield because firms retain part of earnings for reinvestment or buybacks. A company yielding 5% on earnings might pay only 1.5% in dividends.
- Why does earnings yield matter in a higher-for-longer rate regime?
- Earnings yield matters because, when Treasury yields are elevated, a compressed equity earnings yield shrinks the equity risk premium — the compensation for holding stocks over bonds. In the 2025-2026 regime, with 10Y yields near or above 4%, a 5% earnings yield leaves a thin cushion, sharpening scrutiny of whether multiples are justified by earnings growth.
- How is earnings yield used in the Fed model?
- The Fed model compares the forward earnings
Glossary · forward earnings
Forward earnings are the consensus estimate of a company's or index's profits over the next twelve months (or next fiscal year), rather than realised trailing results. Dividing price by forward earnings per share yields the forward P/E, the standard valuation multiple for benchmarking equity prices against expected, not historical, profitability.
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- What does a 5.8% earnings yield imply for the P/E ratio?
- A 5.8% earnings yield corresponds to a price-to-earnings ratio of about 17.2x, since P/E equals 1 divided by the earnings yield (1 / 0.058). Pairing that 5.8% cash-flow yield with roughly 12% expected EPS growth implies a total expected return near 17.8%, decomposing return into yield plus growth.