Are Low Interest Rates Actually Good For Stocks?

Fed model hypothesis

This theory holds that the stock market, at any given point in time is undervalued whenever the earnings yield on equities, which is the inverse of the P/E ratio, is higher than the yield on the 10-year Treasury bond, which is used as a gauge of investors’ expectations for long-term inflation.

Data over the past 150 years, however, reveals that the earnings yield by itself is a more accurate predictor of the stock market’s future return than earnings yields adjusted by the prevailing 10-year Treasury yield. This data shows there is little historical support for the predictive power of the Fed model.

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