TIME FOR THE BULLS?

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.