Fed's Stock Valuation Model Monthly/Weekly

Stock Market Briefing: Fed's Stock Valuation Model

Monthly/Weekly

Yardeni Research, Inc.

March 23, 2022

Dr. Edward Yardeni

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Joe Abbott

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Mali Quintana

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Table Of Contents Table Of Contents

Fed's Stock Valuation Model

1-5

March 23, 2022 / Fed's Stock Valuation Model Monthly/Weekly

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Fed's Stock Valuation Model

Figure 1.

18

17

S&P 500 FORWARD EARNINGS YIELD & NOMINAL 10-YEAR TREASURY BOND YIELD

16

15

14

S&P 500 Forward Earnings Yield* (5.20)

13

10-Year US Treasury

12

Bond Yield** (2.16)

11

10

9

8

7

Mar

6

5

4

3

2

1

0

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

* Year-ahead forward consensus expected earnings divided by S&P 500 stock price index. Monthly through March 1994, then weekly. ** Monthly through March 1994, then weekly.

Source: I/B/E/S data by Refinitiv and Federal Reserve Board.

18 17 16 15 14 13 12 11 10 9 8 7 6 3/18 5 4 3 3/18 2 1 0 21 23

Figure 2.

100

100

STOCKS vs. BONDS VALUATION MODEL (using 10-year Treasury bond yield)*

(percent overvalued or undervalued)

50

50

overvalued

0

undervalued

0

-50

-50

3/18



-100

-100

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23

* S&P 500 stock price index divided by S&P 500 fair-value price defined as S&P 500 12-month forward consensus expected earnings divided by 10-year US Treasury bond yield converted to percentage. Monthly through April 1994, weekly after. Source: I/B/E/S data by Refinitiv and Federal Reserve Board.

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Fed's Stock Valuation Model

Figure 3.

195

S&P 500 FORWARD P/E & RECIPROCAL OF BOND YIELD

185 175 165 155

145

135

125

115

Bond's P/E* (46.3)

105

S&P 500 Forward P/E** (19.2)

95

85

75

65 55 45 35

25

15

5 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17

* Reciprocal of 10-year US Treasury bond yield. ** 52-week forward consensus expected S&P 500 operating earnings per share. Monthly through March 1994, weekly thereafter.

Source: Standard & Poor's and I/B/E/S data by Refinitiv.

195 185 175 165 155 145 135 125 115 105 95 85 75 65 55 3/18 45 35 25 3/18 15 5 19 21 23

28425 24375 20325 16275

12225

Figure 4.

STOCK VALUATION MODEL (using 10-year Treasury bond yield) (ratio scale)

8175

S&P 500 Stock Price Index*

4125

S&P 500 Fair-Value Price**

28425 24375 20325

16275

3/18

12225

8175

3/18

4125



75

75

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25

* Monthly through April 1994, weekly after. ** Year-ahead forward consensus expected earnings divided by 10-year US Treasury bond yield. Monthly through April 1994, weekly after.

Source: I/B/E/S data by Refinitiv, Standard & Poor's, and Federal Reserve Board.

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Fed's Stock Valuation Model

Figure 5.

14.2

14.2

CORPORATE BOND YIELDS*

13.2 (percent)

13.2

12.2

12.2

11.2

Aaa Corporate Bond Yield (3.5)

11.2

Baa Corporate Bond Yield (4.3)

10.2

Average of Aaa and Baa (3.9)

10.2

9.2

9.2

8.2

8.2

7.2

7.2

6.2

6.2

5.2

5.2

4.2

4.2

3/18

3.2

3.2

2.2

2.2



1.2

1.2

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

* Moody's Aaa and Baa yields through 2005, then BoA Merrill Lynch data for AAA and A-BBB yields. Source: Bank of America Merrill Lynch and Haver Analytics.

Figure 6.

13.2

13.2

S&P 500 FORWARD EARNINGS YIELD & CORPORATE BOND YIELD

12.2

12.2

11.2

S&P 500 Forward Earnings Yield* (5.2)

11.2

10.2

Corporate Bond Yield less LTEG weighted by 0.0, 0.1, and 0.2**

10.2

9.2

9.2

8.2

8.2

7.2

7.2

6.2

6.2

5.2

3/18

5.2

4.2

4.2

x0.0

3.2

3.2

x0.1

2.2

2.2

1.2

x0.2

1.2



.2

.2

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

* Year-ahead forward consensus expected earnings divided by S&P 500 stock price index. Monthly through 2005, then weekly. ** Corporate bond yield (average of Moody's Aaa-rated and Baa-rated corporate bond yields) less analysts' consensus of long-term earnings growth.

Monthly through April 1994, weekly after. Source: I/B/E/S data by Refinitiv, Standard & Poor's, and Federal Reserve Board.

Page 3 / March 23, 2022 / Fed's Stock Valuation Model Monthly/Weekly

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Fed's Stock Valuation Model

Figure 7.

7575

6075

STOCK VALUATION MODEL (using average of Aaa and Baa corporate bond yield) (ratio scale)

4575

3075

S&P 500 Stock Price Index

1575

S&P 500 Fair-Value Price*

7575 3/18 6075 3/18 4575

3075

1575



75

75

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23

* Year-ahead forward consensus expected earnings divided by average of Moody's Aaa and Baa yields through 2005, then weekly BoA Merrill Lynch data for AAA and A-BBB yields. Source: I/B/E/S data by Refinitiv, Standard & Poor's, Bank of America Merrill Lynch, and Federal Reserve Board.

Figure 8.

150

150

STOCKS vs. BONDS VALUATION MODEL (using average of Aaa and Baa corporate bond yield)*

(percent overvalued or undervalued)

100

100

50

50

0

0

3/18

-50

-50



-100

-100

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23

* S&P 500 stock price index divided by S&P 500 fair-value price defined as S&P 500 52-week forward consensus expected earnings divided by average of Moody's Aaa and Baa yields through 1996, then weekly BoA Merrill Lynch data for AAA and A-BBB yields, converted to percentage. Source: I/B/E/S data by Refinitiv, Standard & Poor's, Bank of America Merrill Lynch, and Federal Reserve Board.

Page 4 / March 23, 2022 / Fed's Stock Valuation Model Monthly/Weekly

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Fed's Stock Valuation Model

Figure 9.

100

100

STOCKS vs. BONDS VALUATION MODEL

(percent overvalued or undervalued)

50

Using Treasury Bond* (-58.5)

50

Using Corporate Bond** (-24.8)

0

0

3/18

-50

-50

3/18



-100

-100

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25

* S&P 500 52-week forward consensus expected earnings divided by 10-year US Treasury bond yield converted to percentage. Monthly through 2005, weekly after.

** S&P 500 52-week forward consensus expected earnings divided by average of Moody's Aaa and Baa yields through 2005, then BoA Merrill Lynch data for AAA and A-BBB yields, converted to percentage.. Source: I/B/E/S data by Refinitiv, Bank of America Merrill Lynch, and Federal Reserve Board.

Page 5 / March 23, 2022 / Fed's Stock Valuation Model Monthly/Weekly

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