Fed Model at 19-Year Extreme, from Steve Ellison
S&P 500 earnings for 12 months ended June 30, 2007: 84.91
S&P 500 trailing earnings yield: 5.84%10-year bond yield: 4.368%
Ratio of S&P 500 earnings yield to 10-year bond yield: 1.3374
Average ratio of S&P 500 earnings yield to 10-year bond yield since June 1, 1988: 0.8025
S&P 500 index value that would result in an earnings yield of 0.8025 times the current 10-year bond yield: 2422.46
Bud Conrad replies:
The Fed Model is sometimes used with the year-forward earnings projection. If the current price is taken as the given, then forward earnings might drop to .8025/1.3374 or to 60% of current level. That amount is consistent with recession. I expect some of both ahead: Lower earnings in recession and perhaps not so big a drop in the stock market.