The Fed Model- Real Return vs Nominal Return

[FrankNoPez]

The text states that a weakness of the fed model is that it compares a real variable (earnings yield) to a nominal variable (the treasury). The explanation it gives is that interest rates price in inflation so treasuries would be considered a nominal variable. I get that part but this it says that the earnings yield is a real variable. Wouldn’t earnings yields be pricing in inflation as well?

 

[MrSmart]

We’ve had this discussion before. Earnings and price are both real variables, while the treasury yield is a nominal variable divided by price (a real one).
Treasuries price in a fixed amount of expected inflation, while earnings are a byproduct of it’s period’s actual inflation.
To put it in better context, you are comparing a backward looking yield (E/P) with a forward looking yield (YTM).