Is the Fed’s Stock Valuation Model Working Again?

Is the Fed’s Stock Valuation Model Working Again?

Published August 22, 2026 · Finance-Solutes.com Research Desk

A valuation tool that fell out of favor for two decades may be regaining its edge. According to a new note from Yardeni Research, the Fed’s Stock Valuation Model could be becoming useful again. Treasury yields are no longer held down by quantitative easing. The shift matters for anyone trying to gauge whether today’s stock prices make sense against current bond yields.

The model compares the S&P 500’s forward earnings yield with the 10-year Treasury yield. When the earnings yield sits above the bond yield, stocks are considered cheap relative to bonds. Economist Ed Yardeni first popularized the tool in 1997. It tracked markets closely through the 1980s and 1990s, then lost its predictive power for years.

Investor takeaway: The 10-year Treasury yield sits near 4.68%. Yardeni Research pegs S&P 500 fair value at roughly 8,300, above Friday’s close of 7,674.37. The model stays supportive of stocks as long as the 10-year yield holds below 5%. A move past that threshold would flip the signal toward caution.

How the Fed’s Stock Valuation Model Works

The mechanics are simple. Forward earnings yield is the inverse of the forward price-to-earnings ratio. A forward P/E of 20 equals an earnings yield of 5%. That’s roughly what a buyer earns on next year’s projected profits, quoted the way a bond yield is quoted.

Stack that earnings yield against the 10-year Treasury yield, and you get a rough read on relative value. A higher earnings yield than bond yield suggests stocks are undervalued. A lower one suggests the opposite. It is not a forecasting tool, but a snapshot of where two competing asset classes stand against each other today.

Why the Model Stopped Working

Yardeni’s own research shows the model worked well for roughly two decades, then broke down. With the Federal Reserve pinning the 10-year yield near zero through years of quantitative easing, the comparison lost its meaning. Stocks looked perpetually cheap relative to bonds, which was directionally true over the long run but useless as a timing signal. Notably, the model gave no warning ahead of the 2008 bear market during the global financial crisis.

What the Current Numbers Show

The setup looks different now that yields have normalized. As of last week, the 10-year Treasury yield stood at 4.68%. The reciprocal of that yield, expressed as a P/E multiple, works out to about 21.4. The S&P 500’s actual forward P/E currently sits at 19.9, according to Yardeni Research.

That narrow spread implies the index remains modestly undervalued relative to bonds. Based on the 4.68% yield, Yardeni calculates S&P 500 fair value at approximately 8,300. The index closed Friday, August 21, at 7,674.37, up 0.43% on the day. That gap points to roughly 8% of theoretical upside if the model holds.

The 5% Threshold to Watch

Yardeni’s own framing puts a hard number on the risk. If the 10-year yield climbs above 5%, the model’s fair-value P/E would fall to 20. That’s close to where the S&P 500’s forward multiple already trades. Beyond that point, the valuation cushion the model currently shows would largely disappear.

Higher borrowing costs would also raise the odds of an economic slowdown. That adds a second layer of downside risk on top of the pure valuation math. For now, Yardeni’s base case sees the 10-year yield holding in a 4% to 5% range. The firm assigns an 80% probability to its “Roaring 2020s” economic scenario.

The Debt Backdrop Behind the Numbers

Rising yields are unfolding against a heavier fiscal backdrop. Total U.S. national debt crossed $40 trillion for the first time in August 2026, according to Treasury Department data. Of that total, roughly $32 trillion is debt held by the public in the form of marketable Treasury securities.

Annual net interest costs on that debt have climbed to around $1.1 trillion. That now rivals defense spending as a share of the federal budget. Foreign investors continue to hold close to $9.3 trillion in Treasury securities, though the pace of foreign accumulation has slowed. Domestically, U.S. commercial banks have pushed their Treasury holdings to a record near $4.8 trillion as of early August.

Elevated deficits, persistent inflation, and a growing debt load are the main risks Yardeni flags to the model’s base case. None of these factors invalidate the valuation signal on its own. Together, they help explain why yields have drifted higher, and why the 5% line carries so much weight for stocks.

What This Means for Your Portfolio

• Bond yields now matter as much as stock multiples. With the Fed model regaining traction, moves in the 10-year yield could increasingly drive equity valuations, not just earnings growth.
• The 5% yield level is the number to track. Below it, the model leans modestly bullish for stocks. Above it, valuation support fades and recession risk rises.
• This is a monitoring framework, not a trading signal. The model missed the 2008 bear market entirely, so it should complement other analysis rather than replace it.
• Fiscal trends are a background risk. Rising debt and interest costs could keep upward pressure on yields over time. It’s a dynamic worth watching alongside the model itself.

Disclaimer: This article is for informational and educational purposes only and does not constitute financial or investment advice. Treasury yields, equity valuations, and fair-value estimates shift constantly. Always verify current figures against real-time data before making any investment decision. For personalized guidance, Finance-Solutes.com’s free courses and expert advisors can help. They translate reports like this one into a strategy that fits your own portfolio.

Source: Investing.com Vietnam, based on research from Yardeni Research. Figures were cross-checked against Yardeni Research’s own commentary, TradingView, and Benzinga. S&P 500 closing data was confirmed against Yahoo Finance as of August 21, 2026.

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