Independent Financial Research & Analysis
Daily briefings, 7,600+ real-time charts, and macro insights from Dr. Ed Yardeni and his research team.
Research
Latest Research
Recent insights from our research team
The Bond Vigilantes Are Stirring
The US now pays $1 trillion a year in interest on its $40 trillion federal debt. The Fed is waiting to see if inflation will continue to fall on its own. The BOJ is on the verge of more rate hiking. The outlook for oil prices remains uncertain. That has global bond investors pushing up bond yields higher. William discusses why several governments around the world fear for their currencies. … Japan’s PM may retract her opposition to rate hikes, forced by a collapsing yen and rising inflation. … The Japan MSCI’s rally has solid fundamental underpinnings, Toby writes. But yen weakness hurts the performance in dollars. … Central banks have a new crisis-time lender of last resort, the ECB.
Is The Fed's Stock Valuation Model Working Again?
I. The Fed's Stock Valuation Model In his famous December 5, 1996 speech, Fed Chair Alan Greenspan asked, "How can we judge whether stocks are overvalued or undervalued?" His staff apparently scrambled to examine various stock valuation models to help him gauge the market’s exuberance. One such model was made public, albeit buried in the Fed’s Monetary Policy Report to Congress that accompanied Greenspan’s congressional testimony on July 22, 1997. I dubbed it "The Fed's Stock Valuation Model" (FSVM). The name stuck, though Fed officials never publicly endorsed it. The model quite simply compares the S&P 500 forward earnings yield to the 10-year US Treasury bond yield (chart). The forward earnings yield is the reciprocal of the forward P/E. When the forward earnings yield is above (below) the bond yield, the S&P 500 is deemed to be undervalued (overvalued) (chart). The FSVM worked well during the 1980s and 1990s. Then it stopped working because it always showed that stocks were undervalued relative to bonds. That was a good long-term call, but it didn't work as a market-timing tool and missed the bear market during the Great Financial Crisis (GFC). The FSVM may be starting to work again now that the bond market is no longer rigged by the Fed with quantitative easing programs designed to keep the 10-year bond yield close to zero. As a result, the spread between the reciprocal of the bond yield (currently at 21.4) and the S&P 500's forward P/E (currently at 19.9) has narrowed dramatically (chart). Interestingly, despite the recent rise of the 10-year Treasury bond yield, the S&P 500 remains slightly undervalued. If the yield rises to 5.00%, the "fair-value" P/E would be 20.0 (i.e., the reciprocal of the bond yield). That’s roughly where it is now. With the bond yield at 4.68% last week, the fair-value price of the S&P 500 was 8,300 (chart). II. Bond Yield So, we have nothing to fear except a significant rise in the bond yield above 5.00%. That would imply a lower forward P/E for the market. If yields rise to levels that increase the odds of a recession, the downside for the stock market would be greater. That's not our base-case scenario. Our subjective probability for our Roaring 2020s scenario is currently 80%, with 20% including all the bad stuff that could happen, including much higher bond yields. In our base-case scenario, the 10-year yield remains in the 4.00%-5.00% range, which was the norm in the years before the GFC and before the Great Inflation of the 1970s (chart). III. Bond Vigilante Model The risk is that the Bond Vigilantes, a term I coined on July 27, 1983, push the bond yield higher toward the y/y growth in nominal GDP, which was 6.5% in Q2-2026 (chart). They might do so if they lose confidence in the Fed's commitment to bring inflation down. They might also do so in response to rising federal government deficits and debt. In 1983, I wrote, “So if the fiscal and monetary authorities won’t regulate the economy, the bond investors will. The economy will be run by vigilantes in the credit markets.” IV. Bond Buyers Bond Vigilantes include all sorts of bond buyers and sellers. The current concern is that China continues to reduce its holdings of US Treasury debt and that Japan might be forced to do the same to support the yen (chart). The latest aggregate data show that foreign holders of US Treasuries have a near-record $9.3 trillion in these securities (chart). Collectively on a net basis, they've stopped increasing their holdings in recent months, but they aren't decreasing them either. Many other players are in the bond market. US commercial banks have been increasing their holdings of US Treasuries for the past couple of years to a record $4.8 trillion in early August (chart). V. US Treasury Marketable Debt What's spooking the bond market recently is that US public debt has risen to a record $40 trillion, of which $31 trillion consists of marketable securities held by the public (chart). Also worrisome is that net interest paid by the Treasury is up to a record $1.1 trillion (chart). It will continue to rise with the Treasury's debt, and it will increase faster if interest rates rise. In 2023, when Janet Yellen was Treasury Secretary, the Treasury issued more Treasury bills to calm the bond market (chart). Treasury Secretary Scott Bessent seems to be using the same playbook now.
Hawks Versus Owls At The Fed
Today, Ed and Elias share bird’s eye views of the economy from the perches of the hawks and owls on the Fed. The hawks may favor tightening at the FOMC’s September meeting, unconvinced that inflation is on a steady flight path down to the Fed’s 2.0% target. The owls are more confident of inflation’s downward course. July’s subdued inflation readings support their case for holding rates steady in September. But recent labor demand and consumer spending data suggest that the economy is healthy enough for a rate hike, supporting the hawks. August’s data should help clarify whether inflation needs a nudge to return to target or can get there on its own.
Archive
Our Research Library
19 years of daily research, charts, and analysis
Topics
QuickTakes Topics
Timely commentary covering the most important market themes
Charts
Find Any Chart in Seconds
Search across 7,613+ real-time charts with instant visual previews
GENERAL MOTORS: FORWARD PROFIT MARGIN
WELLS FARGO: FORWARD LTEG, STRG & STEG
S&P 500 CONSUMER DISCRETIONARY SECTOR & INDUSTRIES: ANNUAL EARNING GROWTH FORECAST
COLGATE-PALMOLIVE: FORWARD P/E
Sample charts from our collection of 7,613+ visualizations
Tools
Research Tools
Interactive dashboards for tracking economic conditions and market trends
Beige Book Monitor
Fed economic conditions across 12 districts with traffic-light signals.
FOMC Policy Meter
Dovish-to-hawkish policy stance tracker across FOMC meetings.
FOMC Minutes Monitor
Hawk/dove signal extraction across 10 economic themes.
FOMC SEP Monitor
Fed projections and dot plot distributions across meetings.
FOMC Statements
Every FOMC policy statement since 1997 — full text, rates, and voting records.
Private Credit Monitor
Auto-updating chronology of the private credit liquidity crisis.
Release Calendar
Major publications from the Fed, ECB, IMF, and 12 global institutions.
Try Yardeni Research free for four weeks.
Full access to everything we publish. No credit card, no obligation.