Market Briefing: Fed’s Stock Model (Monthly)

Yardeni Research, Inc.

September 24, 2021

Dr. Edward Yardeni 516-972-7683 [email protected]

Joe Abbott 732-497-5306 [email protected]

Mali Quintana 480-664-1333 [email protected]

Please visit our sites at www.yardeni.com blog.yardeni.com

thinking outside the box Table Of Contents TableTable OfOf ContentsContents

Fed’s Model 1-6

September 24, 2021 / Fed’s Stock Valuation Model (Monthly) Yardeni Research, Inc. www.yardeni.com Fed’s Stock Valuation Model Figure 1. 22 22 S&P 500 FORWARD EARNINGS vs 10-YEAR US TREASURY YIELD 20 (percent) 20

18 18

16 S&P 500 Forward * (4.77) 16 10-Year US Treasury Bond Yield (1.28) 14 14

12 12

10 10

8 8

6 6 Aug 4 4

2 2 Aug yardeni.com 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: Standard & Poor’s and Federal Reserve Board.

Figure 2. 100 100 STOCK VALUATION MODEL Latest (-73.14) (using 10-year Treasury bond yield)* (percent overvalued or undervalued)

50 50

0 0

-50 -50

Aug

yardeni.com -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 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.

Page 1 / September 24, 2021 / Fed’s Stock Valuation Model (Monthly) Yardeni Research, Inc. www.yardeni.com Fed’s Stock Valuation Model Figure 3. 185 185 S&P 500 FORWARD P/E & RECIPROCAL OF BOND YIELD 165 165

145 145

125 125

105 Bonds’ P/E* (78.1) 105 S&P 500 Forward P/E** (21.0)

85 85 Aug

65 65

45 45

25 25 Aug

yardeni.com 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.

Figure 4. 24075 24075 20075 20075 16075 STOCK VALUATION MODEL Aug 16075 (using 10-year Treasury bond yield)* 12075 (ratio scale) 12075 8075 8075

S&P 500 Stock Price Index (4454.2) Aug 4075 S&P 500 Fair-Value Price* (16585.9) 4075

yardeni.com 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 / September 24, 2021 / Fed’s Stock Valuation Model (Monthly) Yardeni Research, Inc. www.yardeni.com Fed’s Stock Valuation Model Figure 5. 20 20 CORPORATE BOND YIELDS (percent)

Corporate Bond Yields* AAA Corporate Bond Yield (2.5) 15 A-BBB Corporate Bond Yield (3.2) 15 Average Corporate Yield (2.8)

10 10

Dec

5 5

Aug

yardeni.com 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

15 S&P 500 Forward Earnings Yield* (4.8) 15 Corporate Bond Yield Less LTEG Weighted by 0.0, 0.1, and 0.2** (0.7)

10 10

5 Aug 5

x0.0

x0.1 0 0 x0.2

yardeni.com -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

* 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 -term earnings growth. Source: Thomson Reuters I/B/E/S, Standard & Poor’s, Federal Reserve Board, and Haver Analytics.

Page 3 / September 24, 2021 / Fed’s Stock Valuation Model (Monthly) Yardeni Research, Inc. www.yardeni.com Fed’s Stock Valuation Model Figure 7. 7425 Aug 7425 6375 STOCK VALUATION MODEL 6375 5325 (using corporate bond yield) 5325 4275 (ratio scale) Aug 4275 3225 3225

2175 2175 S&P 500 Stock Price Index (4454.2) S&P 500 Fair-Value Price* (7467.5)

1125 1125

yardeni.com 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

* S&P 500 forward consensus expected operating earnings divided by corporate bond yield (average of Moody’s Aaa and Baa yields through 1996, then average of ICE Bofa Merrill Lynch data for AAA and A-BBB yields). Source: Thomson Reuters I/B/E/S, Standard & Poor’s, Federal Reserve Board, and Haver Analytics.

Figure 8. 150 150 STOCK VS BONDS VALUATION MODEL (using average of Aaa and Baa corporate bond yield)* Latest (-40.35) (percent overvalue or undervalued)

100 100

50 50

Dec

0 0

Aug -50 -50

yardeni.com -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 2005, 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, Merrill Lynch, and Federal Reserve Board.

Page 4 / September 24, 2021 / Fed’s Stock Valuation Model (Monthly) Yardeni Research, Inc. www.yardeni.com Fed’s Stock Valuation Model Figure 9. 100 100 FED’S STOCK VALUATION MODEL (percent overvalued or undervalued) Percentage S&P 500 Over/Under Valued Relative to Fair Value 50 Using Treasury Bond Yield* (-4.7) 50 Using Corporate Bond Yield** (-40.4)

0 0

Aug -50 -50

12/25

yardeni.com -100 -100 79 80 81 82 83 84 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

* S&P 500 12-month forward consensus expected operating earnings divided by 10-year US Treasury bond yield converted to percentage. ** S&P 500 12-month forward consensus expected operating earnings divided by corporate bond yield (using average of Moody’s Aaa and Baa yields through 1996, then average of ICE Bofa Merrill Lynch data for AAA and A-BBB yields) converted to percentage. Source: I/B/E/S data by Refinitiv, Standard & Poor’s, Federal Reserve Board, and Haver Analytics.

Figure 10. 22 22 S&P 500 FORWARD EARNINGS YIELD vs CPI INFLATION 20 (percent) 20

18 18

16 S&P 500 Forward Earnings Yield* (4.77) 16 CPI Ex Food & Energy (3.98) 14 14

12 12

10 10

8 8

6 6 Aug 4 Aug 4

2 2

yardeni.com 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: Standard & Poor’s and Bureau of Labor Statistics.

Page 5 / September 24, 2021 / Fed’s Stock Valuation Model (Monthly) Yardeni Research, Inc. www.yardeni.com Fed’s Stock Valuation Model Figure 11. 22 22 20 S&P 500 FORWARD EARNINGS YIELD vs NOMINAL GDP 20 (percent) 18 18 Q2 16 16 14 14 S&P 500 Forward Earnings Yield* (4.77) 12 GDP 12 10 (yearly percent change) (16.71) 10 8 8 6 6 Aug 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 -8 yardeni.com -10 -10 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: Standard & Poor’s and Bureau of Economic Analysis.

Page 6 / September 24, 2021 / Fed’s Stock Valuation Model (Monthly) Yardeni Research, Inc. www.yardeni.com Copyright (c) Yardeni Research, Inc. 2021. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports and podcasts posted on www.yardeni.com, blog.yardeni.comhttp://blog.yardeni.com, and YRI’s Apps are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company’s stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any --including mutual funds, futures contracts, and exchange traded funds, or any similar instruments.

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