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OK. Example.
S&P Earnings Yield = 7%
Treasury Yield = 4%
S&P 500 Index = 1000 (for simplicity's sake)
S&P 500 Index Earnings = 70
The Fed Model assumes that the S&P Earnings Yield is equal to the Treasury Yield.
Thus:
.04 = 70 / X
Solve for X
X = 1750
S&P 500 is therefore undervalued. Time to buy. |
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