Earning Yield vs 10-year Treasury yield

What Does Earnings Yield Mean?

The earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (which is the inverse of the P/E ratio) shows the percentage of each dollar invested in the stock that was earned by the company. The earnings yield is used by many investment managers to determine optimal asset allocations.

Investopedia explains Earnings Yield
Money managers often compare the earnings yield of a broad market index (such as the S&P 500) to prevailing interest rates, such as the current 10-year Treasury yield. If the earnings yield is less than the rate of the 10-year Treasury yield, stocks as a whole may be considered overvalued. If the earnings yield is higher, stocks may considered undervalued relative to bonds.

Economic theory suggests that investors in equities should demand an extra risk premium of several percentage points above prevailing risk-free rates (such as T-bills) in their earnings yield to compensate them for the higher risk of owning stocks over bonds and other asset classes.

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7/3/2010 from Barron
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Oppenheimer strategist Brian Belski recently noted that the gap between the earnings yield on the S&P 500—earnings divided by the index’s value—of 8% is five percentage points above the 3% yield on the 10-year Treasury note. Belski’s research shows that, historically, when the gap has been this wide, the average one-year return on the S&P has been 26.7%. The last time the gap was so wide was in the late 1970s.