September 16, 2008
Michael Sheehan

Physician's Money Digest, June15 2003, Volume 10, Issue 11

Measuring whether stocks arecheap or expensive can be an exercisein confusion. For example, S&P500 stocks are trading at about 30times earnings, twice the historicaverage, based on last year's earningsfigures. But if you use estimatedearnings for the coming 12 months,the price/earnings (P/E) ratio forthe S&P 500 is a more modest 17.Bullish investors, however, are lookingat the earnings yield, which isearnings per share divided by theshare price—the opposite of the P/Eratio. When the earnings yield ishigher than the yield on the 10-yearUS Treasury bond, some marketmavens say, it's a green light forstock buyers. Currently, the earnings yield on the S&P 500 is runningabout 2 percentage pointsabove the yield on a Treasury bond.