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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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