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One of the models to estimate the equity risk premium is to compare stock earnings yield vs TIPS real yield.
A September 2025 paper in the *International Review of Economics and Finance* finds that this has correlated highly with future stock real returns:
>Abstract
This research demonstrates that the simple difference between the current earnings yield on the S&P500 and the long-term real TIPS yield has significant forecasting power for excess returns on that stock market index over both short-term and long-term investment horizons. For all time frames, deviations from that theoretical identity for the equity premium are positively related to current economic slack in the economy. Over annual horizons, those excess stock return deviations are negatively (positively) associated with recent inflation rates (money growth). Inflation is found to be positively (negatively) related to monetary policy restrictiveness (long-term real profit growth) in the future.
The paper starts by discussing the predictive power of earnings yield in isolation in past research:
>Despite the negative relationship between inflation rates and stock market returns that has often been observed since World War II over short-term investment horizons (Lee, 2010), Siegel (1999) hypothesized decades ago that the current earnings yield on a broad group of blue-chip stocks such as in the S&P500 index may represent a good indicator of real returns on that stock portfolio. This real earnings yield equation for equity returns is supported by the empirical findings of Siegel (2002), who reported that the average real rate of return on the stocks in the S&P Composite Index over the 1871–2000 interval equaled the median ratio between their aggregated profits and prices. Murphy and AlSalman (2023b) have recently shown that the sum of a statistical forecast of long-term future inflation and the current nominal earnings yield on the S&P Composite had a significant 1-1 association with subsequent annual returns on that index over a 150-year time interval.
Next, the past studies combining of inflation estimates plus equity earnings yields are discussed:
>Murphy and AlSalman (2023c) have separately discovered that the consensus prediction of long-term inflation from the Survey of Professional Forecasters (SPF) added to the current earnings yield on the S&P500 had significant power in ex-ante explaining subsequent equity returns across 1-, 5-, and 10-year investment horizons spanning the years 1982–2022. This real earnings yield model for predicting stock market returns implies that, using the breakeven inflation rate on 10-year Treasury Inflation Protected Securities (TIPS) as a proxy for investors’ consensus forecast of inflation, the expected return on the S&P500 in excess of risk-free Treasury rates (i.e., the equity premium) can be computed by subtracting the real yield on TIPS from the current earnings yield on the stock market index (Murphy, 2000, pp. 255–256). Murphy et al. (2014) and Murphy and AlSalman (2023a) have shown that this equity premium identity had a significant 1-1 relationship with subsequent annual excess returns on the S&P500 over two separate decades after the turn of the millennium.
This paper then builds on this by bringing TIPS into the mix, over a more recent time interval:
>In this research, we conduct further tests on the forecasting power of the real earnings yield theory over the entire quarter century since TIPS were initially issued. The results indicate the equity premium identity is significantly related to subsequent excess stock market returns not only over short-term but also long-term time horizons. In particular, in mean squared error (MSE) tests of predictive accuracy, **we find the ex-ante difference between the current S&P500 earnings yield and the TIPS real yield to ex-ante explain much of the variation in subsequent excess stock market returns, with 30–50 % of long-term equity market returns being found to be predictable.** The significance of these results is confirmed in Hjalmarsson (2011) tests, which provide a very conservative adjustment to regression standard errors to address the problems associated with regressor persistence, endogeneity, and overlapping data.
Net result: the ERP as defined by the difference between stock earnings yields and TIPS real yield had a significant (albeit not total) predictive power for future long term returns.
The paper then goes on to examine how monetary policy also plays a role in the variance.
[https://www.sciencedirect.com/science/a ... 602500379X](https://www.sciencedirect.com/science/article/pii/S105905602500379X)
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What does this mean for individual investors?
If you're doing planning and trying to estimate future returns:
a) Stock earnings yields is worth paying attention to, as it is highly correlated with future returns
If you're wondering how much risk is being compensated for by investing in stocks:
b) Earnings yield vs TIPS real yield is highly correlated with explaining excess stock market returns; if the spread is wide, expect high excess returns, and vice versa.