The S&P 500's earnings yield has slipped 1.5 percentage points below the 10-year Treasury yield, the widest negative gap since 2009. The spread is on track for a third straight year in negative territory, the longest such streak since 2002. Since 2022, the gap has plunged 4.4 percentage points—the biggest five-year decline since the 1970s.
What the spread measures
The equity risk premium, or yield spread, is the difference between the S&P 500's earnings yield and the 10-year Treasury yield. The earnings yield is simply earnings divided by price, the inverse of the P/E ratio. When the spread turns negative, stocks are offering less yield than risk-free government bonds. Right now, with the 10-year Treasury at about 5.36%—its highest since October 2002—and the spread at -1.5 points, the implied earnings yield is near 3.9%. That translates to roughly 26 times trailing earnings.
Negative readings have historically clustered around periods of heavy risk-taking and elevated valuations. The dynamic is simple: when bond yields rise, they compete more directly with equities for investor dollars, pressuring stock valuations unless earnings growth accelerates.
Bond yields are calling the tune
Treasury yields have climbed on oil-driven inflation and heavy federal borrowing. The 10-year note touched 5.36% on Oct. 7, a level last seen two decades ago. That surge has outpaced earnings growth, compressing the spread to its current extreme.
Bloomberg columnist Nir Kaissar found in 2025 that the premium barely predicted returns over one to five years. But over a 10-year horizon, the link was stronger, with a 0.51 correlation. That suggests the spread is a poor timing tool for traders but a useful gauge for long-term investors.
Forward earnings offer a calmer picture
On forward earnings, the S&P 500 trades near 19 times expected profits, according to FactSet. That puts the forward earnings yield near 5.3%, roughly level with the 10-year Treasury. So while the trailing spread looks alarming, the forward-looking gap is essentially zero.
The divergence matters. Trailing earnings reflect what companies have already delivered; forward estimates bake in expected growth. If those forecasts hold, the valuation picture is less stretched than the headline spread implies.
Narrow market, steady yields
The S&P 500 is near record highs, but the rally has been narrow. A handful of large-cap names are driving gains, leaving the index vulnerable if bond yields keep climbing. The Kobeissi Letter expects an eventful fourth quarter, though it cautions that the spread alone cannot time a turning point.
For now, the math is straightforward: with the 10-year at 5.36% and the spread at -1.5 points, the S&P 500's earnings yield sits near 3.9%. That's about 26 times trailing earnings. Whether that multiple holds depends on whether bond yields stabilize—or keep rising.
