A stock-valuation framework long dismissed as unreliable is drawing renewed attention as rising Treasury yields restore its signaling power. The model, developed by Yardeni Research, compares the S&P 500’s forward earnings yield with the 10-year U.S. Treasury yield, treating equities as undervalued when the earnings yield exceeds the bond yield.
The framework performed well in the 1980s and 1990s but lost predictive value in subsequent decades, consistently flagging equities as cheap even during downturns, including the 2008 financial crisis. Its resurgence coincides with the Federal Reserve’s shift away from quantitative easing, which had suppressed Treasury yields and distorted traditional valuation signals.
Current readings show the 10-year Treasury yield at 4.68%, translating to an earnings-yield equivalent of 21.4. The S&P 500’s forward price-to-earnings ratio stands at 19.9, implying a fair-value estimate near 8,300 for the index under Yardeni’s framework. The firm expects the 10-year yield to trade between 4% and 5% in its base-case scenario, assigning an 80% probability to a “Roaring 2020s” economic outlook.
Analysts caution that the model’s revival remains contingent on macro stability. Persistent inflation, widening federal deficits, and soaring debt levels—U.S. public debt has surpassed $40 trillion, including $31 trillion in marketable securities—pose structural risks. Annual net Treasury interest costs have surged to a record $1.1 trillion, while foreign holdings of Treasuries remain near historic highs at $9.3 trillion, though growth in these positions has stalled.
U.S. commercial banks have also expanded their Treasury portfolios to a record $4.8 trillion, reflecting increased demand for high-quality liquid assets. However, the model’s sensitivity to higher yields remains a key vulnerability. A sustained rise in the 10-year yield above 5% could compress the S&P 500’s fair-value earnings multiple, amplifying downside risks if borrowing costs further strain economic growth.
