Fed's Stock Valuation Model (Monthly) - Yardeni Research

Stock Market Briefing: Fed's Stock Valuation Model

(Monthly)

Yardeni Research, Inc.

April 29, 2020

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

April 29, 2020 / Fed's Stock Valuation Model (Monthly)

Yardeni Research, Inc.



Fed's Stock Valuation Model

Figure 1.

18

18

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

17

17

16

16

15

15

14

14

13

13

12

S&P 500 Forward Earnings Yield* (6.5) 10-Year US Treasury Bond Yield (0.9)

12

11

11

10

10

9

9

8

8

7

7

Mar

6

6

5

5

4

4

3

3

2

2

1

Mar

1



0

0

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 12-month forward consensus expected operating earnings divided by S&P 500 stock price index. Source: I/B/E/S data by Refinitiv and Federal Reserve Board.

Figure 2.

100

100

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

(percent overvalued or undervalued)

50

50

0

0

-50

-50

Mar -100 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21

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

-100 23

Page 1 / April 29, 2020 / Fed's Stock Valuation Model (Monthly)

Yardeni Research, Inc.



Fed's Stock Valuation Model

Figure 3.

120

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

120

Mar

115

110

110

105

105

100

100

95

95

90

90

85

85

80

80

75

75

70

Bonds' P/E* (114.9)

70

65

S&P 500 Forward P/E** (15.4)

65

60

60

55

55

50

50

45

45

40

40

35

35

30

30

25

25

20

20

15

Mar

15

10

10

5

5

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

* Reciprocal of 10-year US Treasury bond yield. ** S&P 500 stock price index divided by S&P 500 12-month forward consensus expected earnings.

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

24075 20075 16075

12075

Figure 4.

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

8075 S&P 500 Stock Price Index

4075

S&P 500 Fair-Value Price*

24075

Mar

20075

16075

12075

8075

4075 Mar



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

* S&P 500 12-month forward consensus expected operating earnings divided by 10-year US Treasury bond yield. Source: I/B/E/S data by Refinitiv and Federal Reserve Board.

Page 2 / April 29, 2020 / Fed's Stock Valuation Model (Monthly)

Yardeni Research, Inc.



Fed's Stock Valuation Model

Figure 5.

20

20

CORPORATE BOND YIELDS

(percent)

Corporate Bond Yields*

AAA Corporate Bond Yield

15

A-BBB Corporate Bond Yield

15

Average Corporate Yield

10

10

5

5

Mar



0

0

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

* Moody's data for Aaa and Baa yields through 1996, then ICE Bofa Merrill Lynch data for AAA and BBB yields. Source: Federal Reserve Board and Haver Analytics.

Figure 6.

20

20

S&P 500 FORWARD EARNINGS YIELD & CORPORATE BOND YIELD

S&P 500 Forward Earnings Yield*

15

Corporate Bond Yield Less LTEG

15

Weighted by 0.0, 0.1, and 0.2**

10

10

Mar

5

5

x0.0

x0.1

x0.2



0

0

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 12-month forward consensus expected operating earnings divided by S&P 500 stock price index. ** Corporate bond yield (average of Moody's Aaa and Baa yields through 1996, then average of ICE Bofa Merrill Lynch data for AAA and BBB yields)

less analysts' consensus of S&P 500 long-term earnings growth. Source: Thomson Reuters I/B/E/S, Standard & Poor's, Federal Reserve Board, and Haver Analytics.

Page 3 / April 29, 2020 / Fed's Stock Valuation Model (Monthly)

Yardeni Research, Inc.



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