Corporate Bond Yields Update

We recently looked at the role of corporate bond yields as a price floor. Here's an updated bond yield chart:

Notice that bond yields have started to creep back up, and so has the earnings yield. The good news is that this indicates prices have begun to stabilize back on the bond floor. The bad news is that floor may be falling.

Note: The S&P earnings yield used here is calculated by dividing the current S&P 500 index ($825.88) by 4 times the current Dec. 2008 EPS estimate ($8.73) to yield 4.2%. This is to be consistent with the previous data used in the chart. However, if you use the forecasted 12 month EPS, the earnings yield is actually higher (4.8%) and pretty close to the current AAA bond yield.

S&P Earnings Forecasts

Standard & Poor's regularly publishes the earnings report on the S&P 500 here. This includes a forecast of upcoming quarterly earnings. Here's a chart of the current (1/22/2009) forecasts:

First, note that during the last recession (.com bubble), it took 3 full years for earnings to recover to the previous peak.

Right now, earnings are at 1999 levels, a 55% drop from the peak in mid-2007. The current forecasts go through the end of 2010, and predict a modest gain, but not a recovery.

Forecasts are, of course, largely backwards looking, and are revised constantly. However, this probably captures as best as anything the prevailing thinking on the economy: i.e. that it's going to be a long hard road for a while.