We are experiencing the widest spread in the S&P 500 earnings yield and the 10 year Treasury rate in modern market history.

 Panicked investors have bid up the price of Treasury bonds and sold down the price of equities to such a degree that the earnings yield on equities (the reciprocal of the P/E) is now 405% greater than the yield on the 10 year Treasury!  This is simply unprecedented in the lives of anyone active in the market today.  The earnings yield on the S&P 500 is now 8.4% compared to the yield on the 10 yr. Treasury of 2.08%.  Anyone who believes in regression to the mean should be wildly bullish.  The mean spread is 108%.  The implication is the Treasury rate must either go up to 7.8% or the earnings yield must fall to 2.2%.  An earnings yield of 2.2% would equal a P/E ratio of 45X.  Meeting in the middle suggests a P/E ratio close to 20X vs. today P/E ratio of 12.4X.  Either way – something has to give!  Jeb Terry, Sr. Aug 19, 2011

Aberdeen Investment Management – a guide service for micro-cap technology investment

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