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What is the Earnings Yield Gap?
The Earnings Yield Gap compares the earnings yield of stocks (inverse of P/E) to the yield of 10-year Treasury bonds. This indicator measures the relative attractiveness of stocks compared to risk-free bonds.
Investors constantly arbitrage between stocks and bonds. If stocks offer a yield (E/P) significantly higher than bonds, they are attractive. If the gap narrows or becomes negative, it signals that stocks are expensive relative to bonds, creating a risk of rotation towards risk-free assets.
ONELIX publishes the reading logic and historical statistics of the signal, but not the full proprietary transformation. The guide below remains aligned with the interactive analysis level of detail.
Impact of interest rates
This indicator is particularly relevant in a changing rate environment. When rates rise (bonds more attractive), a low gap becomes dangerous as investors can easily switch to bonds. When rates are low, investors tolerate a lower gap.
A P/E of 20 corresponds to an Earnings Yield of 5%. If the 10-year Treasury is at 4%, the gap is 1 percentage point.
The EYG is an excellent complement to pure valuation indicators, integrating the opportunity cost dimension — but it does not turn this gap into an automatic market decision.
How the signal is built
Earnings Yield Gap calculation
The Earnings Yield Gap is calculated by comparing the earnings yield of stocks (inverse of S&P 500 P/E ratio) to the yield of 10-year Treasury bonds. A positive gap indicates that stocks offer higher yield than bonds. A negative gap signals that bonds are more attractive.
Trend model and standard deviations (inverted logic)
To identify significant deviations from historical norms, ONELIX calculates standard deviations of the gap from its historical average. The model uses inverted logic: a low gap generates a positive standard deviation (high risk), because stocks become expensive relative to bonds. A deviation of +2σ indicates an abnormally low gap, signaling relative overvaluation that often precedes corrections.
Normalized indicator (0–100%)
Based on these standard deviations, ONELIX develops a normalized indicator from 0 to 100% using a proprietary formula. This normalized indicator is the one displayed in the main dashboard and used for LIX calculation.
The exact normalization formula and certain robustness parameters are not published. The normalized indicator transforms standard deviations into an intuitive scale where 0% represents a very high gap (attractive stocks) and 100% a very low gap (expensive stocks vs bonds).
Historical reading
The chart below presents the raw value of the Earnings Yield Gap from 1962 to year-end 2025.
Earnings Yield Gap — Equity earnings yield minus bond yield
Monthly values, January 1962 → December 2025
Sources: S&P 500, earnings, 10-year Treasury (FRED DGS10), ONELIX calculation. Red bands: 15 major corrections tracked in ONELIX.
Historically, a small or negative gap signals that equities offer little relative premium over bonds. This reading becomes particularly important when rates rise, since equity valuation must then be compared to a more rewarding bond alternative.
The ONELIX reading of the Earnings Yield Gap
ONELIX reads the Earnings Yield Gap as an equity/bond relative valuation indicator. It complements PE10 / CAPE (absolute valuation), the Buffett Indicator (market cap / GDP) and S&P Mean Reversion (trend deviation).
The normalized score uses inverted logic: a low gap (equities poorly compensated vs bonds) produces a high score, signaling a risk of rotation towards risk-free assets. A wide gap produces a low score, signaling a relatively generous equity premium.
Across 15 major corrections (≥19%) since 1962, the signal showed clear detection (≥75%) in 7% of cases (1987), moderate signal (60–75%) in 36% (1973, 1990, 1998, 2000, 2025), and remained low (<60%) in 57% — notably 1966, 1969, 1980, 2008, 2011, 2018, 2020, 2022.
The signal becomes more robust when it converges with PE10 / CAPE, the Buffett Indicator, credit or volatility.
Product preview. Frozen historical capture of the ONELIX dashboard illustrating the Earnings Yield Gap reading.
In the LIX composite score, the Earnings Yield Gap belongs to the Valuation family. The ONELIX methodology details normalization.
Limits and vigilance points
The Earnings Yield Gap is useful as a relative reference, but it has important nuances.
- Earnings quality: does not capture if earnings are sustainable.
- Growth ignored: does not account for stocks' growth potential.
- Variable timing: a low gap can persist for years.
- Combined reading: the EYG should be cross-checked with absolute valuation, credit and macro cycle.
The EYG is an excellent complement to pure valuation indicators, integrating the opportunity cost dimension — but it does not say when the market will correct, nor what the magnitude of a future drawdown will be.
Explore the Earnings Yield Gap in ONELIX
Interactive charts, drawdown statistics, historical zones and dedicated backtest.
Frequently asked questions
What does the Earnings Yield Gap measure?
The gap between the earnings yield on equities (inverse of S&P 500 P/E) and the yield on 10-year Treasury bonds.
Why compare equities to bonds?
Bonds represent an alternative source of return. The comparison helps assess whether equities offer sufficient relative compensation in a given rate regime.
Why is the ONELIX logic inverted?
A low gap signals that equities are expensive relative to bonds; the model transforms this into a high score (risk), and vice versa for a wide gap.
Can the Earnings Yield Gap forecast corrections?
No. It contextualizes the relative valuation of equities versus bonds, but it does not predict the timing of corrections on its own.
How does ONELIX turn the EYG into a 0-100 score?
ONELIX computes standard deviations of the gap with inverted logic, then applies a proprietary formula to produce a normalized score integrated into the LIX.
What is the difference with PE10 / CAPE?
PE10 / CAPE measures absolute valuation via smoothed earnings; the EYG explicitly incorporates bond yields as an alternative source of return.