What You Need to Know
- Concerns that the earnings yield is less than the inflation rate are misplaced, the analysts say.
- Stock earnings and prices tend to rise with inflation, according to the analysts.
- But overall, stocks do better in a low-inflation environment than a high-inflation one, they write.
Despite investor concerns, rising inflation is not necessarily bad for stocks.
“We believe the popular investor focus on an earnings yield [being] less than [the] inflation rate is misplaced,” write Goldman Sachs strategists in their latest U.S. Weekly Kickstart report. “Equity earnings and the prices tied to them are nominal and typically rise with inflation.”
Moreover, most recent U.S. inflation reports “are biased by base effects and reopening dynamics,” according to the strategists, referring to the comparison of price data this year with the data last year when the economy was struggling with pandemic-induced lockdowns.
In addition, the gap between the earnings-per-share (EPS) yield and the 10-year U.S. Treasury yield, a common proxy for the excess return of stocks compared to risk-free Treasurys, remains above its long-term average, according to the Goldman Sachs analysts led by David Kostin, chief U.S. equity strategist.