Earnings yield: flip the P/E upside down

Flip the S&P 500's forward P/E of 18.5 upside down and it becomes an earnings yield of about 5.4% — above the 4.91% a 10-year Treasury paid on November 2. The thin gap is the whole valuation debate right now.

Turn the ratio upside down

The price-to-earnings ratio, or P/E, answers one question: how many dollars do investors pay for one dollar of earnings? Flip the fraction over and you get the earnings yield: earnings per share divided by the share price, or 1 divided by the P/E. Investopedia's textbook example makes the flip concrete: a stock at $10 with earnings per share of 50 cents over the past 12 months has a P/E of 20 — and an earnings yield of 5%. The yield says what each dollar invested earns in a year; the P/E says what each dollar of earnings costs.

Apply the same flip to the whole market. MarketWatch, reporting FactSet data on November 2, 2026, put the S&P 500's forward P/E at 18.5. One divided by 18.5 is about 5.4%, so the market's forward earnings yield is about 5.4%: each dollar invested in the index buys about 5.4 cents of expected earnings over the coming year. Note the word expected — the forward yield is built on analysts' forecasts, not on earnings already in the bank, which is why the next sections matter.

Stocks vs bonds: a gap of half a point

An earnings yield earns its keep when it is compared with something else — usually the yield on a 10-year Treasury bond. On November 2, 2026, the 10-year Treasury yielded 4.91%, according to the U.S. Treasury's daily par yield curve. Against the market's forward earnings yield of about 5.4%, the gap is about 0.5 percentage points: stocks offer roughly half a point more than the Treasury yield, in exchange for taking equity risk.

Investopedia calls this comparison the bond-equity earnings yield ratio: bond yield divided by earnings yield. Its textbook example is simple: if the S&P 500's P/E is 25, the earnings yield is 1 divided by 25, or 4%. The idea behind the comparison, sometimes called the Fed model, is that stocks and bonds compete for the same dollar, so their yields should sit near each other.

But the comparison has limits. A Treasury yield is a contract — the government promises the coupon. An earnings yield is a forecast — companies can miss it, and the earnings behind it can grow. That growth is exactly why investors accept a thin premium: the 5.4% is not fixed, while the 4.91% is. The flip is a lens for comparing, not a signal to buy or sell.

How the multiple fell while earnings rose

The forward P/E did not fall because prices collapsed. MarketWatch, reporting FactSet data, put the S&P 500's forward P/E at 18.5 in early November — its lowest since April 2025 — and below both the 5-year average of 20.14 and the 10-year average of 19.55. Since the start of the year, the multiple has dropped nearly 17%.

The earnings behind the multiple are growing fast. With 60% of S&P 500 companies having reported, third-quarter earnings are exceeding estimates by just 1.9% in aggregate — below the five-year average of around 7.5% — while the blended growth rate for Q3 is more than 30%. Analysts expect earnings to grow another 25% in the fourth quarter and more than 16% in 2027. A falling multiple with rising earnings is the market repricing risk, not the market giving up on growth — and the earnings yield is simply the same repricing, seen from the other side.

Three traps in the flipped ratio

First, forward earnings are forecasts, and forecasts get cut. An earnings yield built on estimates that later fall is not a yield at all — it is a hope with a percent sign. Check whether analysts are raising or cutting estimates before trusting the number.

Second, the forward lens can flatter. The Shiller CAPE divides price by 10 years of inflation-adjusted earnings, and in history it has only risen above 30 in 1929 and 2000 — the peaks before the two great crashes. The same market can look cheap on next year's earnings and dear on the last decade's. Which lens is right depends on whether the recent surge in earnings lasts.

Third, a high yield can mean trouble, not a bargain. A company with an earnings yield of 10% and shrinking earnings is not the same as one with a yield of 5% and growing earnings: the first may be priced for a fall in profits, the second for growth. Earnings yield ignores growth, ignores risk, and ignores the quality of the earnings themselves. Use the flip to compare stocks with bonds and to see the market from the other side — but never as a verdict on its own. Educational content, not investment advice.

Sources

• Investopedia
• Investopedia
• Investopedia, 2026-11-14
• Morningstar, 2026-11-02
• U.S. Department of the Treasury, 2026-11-02