Bond Equity Earnings Yield Ratio - BEER
Definition of 'Bond Equity Earnings Yield Ratio - BEER'
A metric used to evaluate the relationship between bond yields and earnings yields in the stock market. The Bond Equity Earnings Yield Ratio (BEER) has two parts – the top is represented by a benchmark bond yield (such as five- or 10-year Treasuries) while the bottom is the current earnings yield of a stock benchmark (such as the S&P 500).
Also known as the BEYR or the Gilt-Equity Yield Ratio (GEYR).
Investopedia explains 'Bond Equity Earnings Yield Ratio - BEER'
A BEER of 1 would indicate equal levels of perceived risk in the bond market and the stock market. Analysts often feel that BEER ratios greater than 1 imply that equity markets are overvalued, while numbers less than 1 mean they are undervalued, or that prevailing bond yields are not adequately pricing risk.
Consider the example of a BEER made up of a 10-year Treasury with a current yield of 4.5% and an S&P 500 earnings yield of 5% (P/E of 20). The ratio created would resemble the following:
Bond Yield (4.5) / Earnings Yield (5) = 0.9
The earnings yield of the stock market (or simply an individual stock) is just the inverse of the P/E ratio. If the BEER is above normal levels the assumption is that the price of stocks will decrease thus lowering the BEER.