Fed Model

[doobsmeister]

Under Relative Equity Market Valuation Models, why does the Fed Model compare the S&P earnings yield with the 10 year treasury yield. Firstly, equities are riskier than government bonds, so why would one compare the two apples to apples? It says to consider equities undervalued if their earnings yield is higher than th treasury yield. Can someone help explain this?

 

[cpk123]

for part 1) read the various shortcomings of the fed model. I believe that is one of the shortcomings.
2) If the lower treasury yield were used - (yield is on the denominator on most value calculations) the equity would have been higher valued - so it is undervalued if earnings yield > Treasury Yield.