Fed Model

The Fed Model is a way investors compare the stock market's value to U.S. government bonds to decide if stocks are attractive. It compares the earnings yield of stocks (the inverse of the price-to-earnings ratio) to the yield on long-term Treasury bonds. If stocks offer a higher earnings yield than bond yields, they may be considered undervalued and potentially a good investment. Conversely, if bond yields are higher, stocks might be overvalued relative to bonds. The model helps investors assess whether to favor stocks or bonds based on current interest rates and earnings expectations.