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S&P 500 Earnings Yield, Fed Model, FOMC Meeting, Year-End Rally
2015-12-13 21:21:10| Air Courier - Topix.net
"Fed Model" fans are familiar with the S&P 500 earnings yield since it is the Fed Model calculation that subtracts the 10-year Treasury yield from the earnings yield of the S&P 500 to get a broadly-based market valuation measure that was once cited by Alan Greenspan in the late 1990s as indicative of what he thought was an overvalued stock market. If we look at the yield on the 10-year Treasury in July 1997 - roughly a 5%-5.25% yield - and the year-end S&P 500 earnings were $43.50 and in July 1997, the S&P 500 was trading at - let's call it 925 - the S&P 500 earnings yield was roughly 4.7%, so the Fed Model, with a value of -0.50, was indicating in mid-2007 that the S&P 500 was overvalued.
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