Fed's Stock Valuation Model Monthly/Weekly
Stock Market Briefing: Fed's Stock Valuation Model
Monthly/Weekly
Yardeni Research, Inc.
January 2, 2020
Dr. Edward Yardeni
516-972-7683 eyardeni@
Joe Abbott
732-497-5306 jabbott@
Mali Quintana
480-664-1333 aquintana@
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Table Of Contents Table Of Contents
Fed's Stock Valuation Model
1-5
January 2, 2020 / Fed's Stock Valuation Model Monthly/Weekly
Yardeni Research, Inc.
Fed's Stock Valuation Model
Figure 1.
18
S&P 500 FORWARD EARNINGS YIELD & NOMINAL 10-YEAR TREASURY BOND YIELD
17
16
15
14
S&P 500 Forward Earnings Yield*
13
10-Year US Treasury
Bond Yield**
12
11
10
9
8
7
6
5
4
3
2
1
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
* 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 12/13 5 4 3 12/27 2 1 19 21
Figure 2.
100
100
STOCKS vs. BONDS VALUATION MODEL (using 10-year Treasury bond yield)*
(percent overvalued or undervalued)
50
50
0
0
-50
-50
12/13
-100
-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 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.
Page 1 / January 2, 2020 / Fed's Stock Valuation Model Monthly/Weekly
Yardeni Research, Inc.
Fed's Stock Valuation Model
Figure 3.
75
S&P 500 FORWARD P/E & RECIPROCAL OF BOND YIELD
70
65
60
55
50
45
Bond's P/E* (52.6)
40
S&P 500 Forward P/E** (17.9)
35
30
25
20
15
10
5 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
* 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.
75
70
65
60
55 12/27
50
45
40
35
30
25
20 12/13
15
10
5 17 19 21
12375 10325 8275
6225
Figure 4.
STOCK VALUATION MODEL (using 10-year Treasury bond yield) (ratio scale)
4175
S&P 500 Stock Price Index* S&P 500 Fair-Value Price** 2125
12/13 12/27
12375 10325 8275 6225 4175
2125
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
* 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.
Page 2 / January 2, 2020 / Fed's Stock Valuation Model Monthly/Weekly
Yardeni Research, Inc.
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 (3.0)
11.2
Baa Corporate Bond Yield (3.8)
10.2
Average of Aaa and Baa (3.4)
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
3.2
12/27 3.2
2.2
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
* 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
11.2
10.2
S&P 500 Forward Earnings Yield* (5.6)
10.2
Corporate Bond Yield less LTEG
9.2
weighted by 0.0, 0.1, and 0.2**
9.2
8.2
8.2
7.2
7.2
6.2
6.2
12/13
5.2
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
* 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 / January 2, 2020 / Fed's Stock Valuation Model Monthly/Weekly
Yardeni Research, Inc.
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