Earnings Yield & Profitability

Hope your week is going well. Today, I wanted to highlight recent trends in the two key components of what is referred to as "Quality" - the Earnings Yield and Profitability factors.

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Our Factor Profile tool is currently indicating that Earnings Yield and Profitability are reaching simultaneous inflection points in our US model. As I'll show below, historically both of these factors have very strong positive risk premia in the long term, but this remains a noteworthy trend that we'll continue to monitor as there is potential for a reversion in the near-term for both of these factors.

Earnings Yield

• In our model, Earnings Yield is defined as a blend of Earnings-to-price, and estimated earnings-to-price.

• After losing some ground and hitting a nadir on March 5th of -2.41 standard deviations below the mean, this factor has sharply trended upward, currently sitting at +2.12 SD above the mean.

Taking a look at the long-term trend for Earnings Yield, it's clear that this factor has a highly positive long-term risk premia:

Profitability

• In April, we had flagged Profitability as an "Extremely Overbought" factor. Since then, the factor saw a near-term pullback and has since rallied back to +1.03SD above the mean, up +4.1% on a cumulative basis in the past 12 months.

• As a reminder, we define Profitability as a combination of return-on-equity, return-on-assets, cash flow to assets, cash flow to income, gross margin, and sales-to-assets.

Looking back to 2007, we can see that Profitability has an even stronger long-term positive risk premia baked in than Earnings Yield:

Because these factors are viewed as the pillars of Quality in the market, it's important to note that they do have a strong upward trend. In the near-term, however, we will keep an eye out for any potential inflection points that might suggest a reversion to their long-term mean.

If you'd like to see what Earnings Yield, Profitability, or any other factors look like in your portfolio's performance and risk profile, or would like to better understand how we measure the relationships between factors, please don't hesitate to reach out.

Regards,
Omer