Corporate earnings projections have fallen sharply amidst the COVID-19 crisis. The 12-month forward earnings projections for S&P 500 companies dropped 12.35% in the 2nd quarter. For the year, projected earnings are down 18.42%.
Contributing to that decline were a variety of industries that have been affected by the slow-down, such as oil, retail, sports and entertainment, food and hospitality, autos, airlines, and banks. However, the decline in projected earnings began to flatten over the past two months as more businesses began to reopen.
As stock prices began to rebound, the forward S&P 500 price-earnings ratio (P/E) moved up significantly– from 15.43 at the end of the 1st quarter to 21.72 at the end of the 2nd quarter. That’s the highest level since 2002. However, the P/E could move back down if earnings projections begin to recover.
As stock prices climbed during the past quarter while projected earnings declined, the forward 12 months earnings yield for the S&P 500, which is the inverse of the P/E, began to decline. It ended the 2nd quarter at 4.68%, which is down significantly from 6.60% at the end of the 1st quarter. The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. The yield remains significantly higher than the 0.65% rate of 10-year U.S. Treasuries.