Testing the Stock Market Earnings Yield-TIPS Yield Delta

“Predicting Stock Market Return with Stocks-TIPS Yield Delta” summarizes results of a study finding that deviations of the S&P 500 earnings yield from the real government bond yield, as measured by the 10-year Treasury Inflation-Protected Securities (TIPS) coupon yield, has statistical power to predict future stock market returns. To corroborate this finding from an investing perspective, we:

• Reuse monthly estimates of the S&P 500 operating earnings yield from the Simple Asset Class ETF Value Strategy (SACEVS).
• Obtain the monthly series of market yields on 10-year constant maturity TIPS.
• Relate monthly differences between these two series to future monthly S&P 500 Index (SP500) returns via linear lead-lag regressions and ranked sorting.

Using monthly data as specified during January 2003 (limited by the TIPS series) through November 2024, we find that: (more…)