What Is an Earnings Yield and How Does It Compare With Treasury Yields?

A stock trading at 20 times earnings can look expensive or cheap depending on what investors can earn elsewhere.

The earnings yield makes that comparison easier. It shows how much annual earnings a company generates relative to its stock price.

The formula is simple:

Earnings yield = Earnings per share ÷ Share price

It is also the inverse of the P/E ratio.

A stock trading at 20 times earnings has a 5% earnings yield. At 25 times earnings, the yield is 4%. At 10 times earnings, it is 10%.

That does not mean investors literally receive the earnings yield in cash. It is a valuation measure, not a dividend.

Why Compare It With Treasury Yields?

Treasuries provide a useful benchmark because they offer a contractual return without the same business risk as stocks.

The U.S. Treasury publishes current rates across the yield curve through its official interest-rate data.

Suppose the S&P 500 trades at a forward P/E of 20. That implies a 5% earnings yield.

If the 10-year Treasury yields only 2%, stocks still offer a much larger earnings return in exchange for taking more risk. But if the Treasury yield rises to 5%, the simple yield advantage disappears.

That is one reason higher Treasury yields can pressure equity valuations, particularly expensive technology and growth stocks.

Higher Bond Yields Raise the Bar for Stocks

Stocks and Treasuries are not directly interchangeable.

Corporate profits can grow, giving shareholders both rising earnings and potential price appreciation. Bond payments are fixed. But stocks also carry much more uncertainty.

That means the gap between earnings yield and bond yields can help investors judge how much compensation they are receiving for taking equity risk.

A simple comparison might look like this:

Stock earnings yield 10Y Treasury yield Simple spread 5% 2% 3% 5% 4% 1% 5% 5% 0%

As the spread narrows, bonds become relatively more competitive.

This helps explain why moves in Treasury yields can affect the entire stock market even when corporate earnings remain unchanged.

Is Earnings Yield the Same as the Equity Risk Premium?

Not exactly.

Subtracting the Treasury yield from the earnings yield is sometimes used as a rough valuation shortcut, but the true equity risk premium is more complicated.

Professional models can include expected earnings growth, dividends, buybacks and future cash flows. They also account for the fact that Treasury yields include components such as expected interest rates and the term premium.