Fed's Stock Valuation Model Monthly/Weekly

Stock Market Briefing: Fed's Stock Valuation Model

Monthly/Weekly

Yardeni Research, Inc.

December 6, 2023

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

December 6, 2023 / 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* (5.31)

13

10-Year US Treasury

12

Bond Yield** (4.32)

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 21

18 17 16 15 14 13 12 11 10 9 8 7 6 12/1 5 12/1 4 3 2 1 0 23 25

* 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.

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

12/1

-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 25

* 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

195

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

185

185

175

175

165

165

155

155

145

145

135

135

125

125

115

Bond's P/E* (23.1)

115

105

S&P 500 Forward P/E** (18.8)

105

95

95

85

85

75

75

65

65

55

55

45

45

35

35

25

12/1 25

12/1

15

15



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 25

* 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.

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 12225

8175

12/1 12/1 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 (5.0)

11.2

Baa Corporate Bond Yield (5.9)

10.2

Average of Aaa and Baa (5.4)

10.2

9.2

9.2

8.2

8.2

7.2

7.2

6.2

6.2

5.2

12/1 5.2

4.2

4.2

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* (5.3)

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

12/1 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 25

* 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.

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Fed's Stock Valuation Model

Figure 7.

9075

7575 STOCK VALUATION MODEL (using average of Aaa and Baa corporate bond yield) 6075 (ratio scale)

4575

3075

S&P 500 Stock Price Index S&P 500 Fair-Value Price* 1575

9075 7575 6075 12/1 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 25

* 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

12/1 0

-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 25

* 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 / December 6, 2023 / 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* (-18.6)

50

Using Corporate Bond** (2.5)

0

12/1 0

12/1

-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 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 / December 6, 2023 / Fed's Stock Valuation Model Monthly/Weekly

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