Equities • Macro
The Fed Model: Equities vs. Treasury Yields Explained
Origins, mathematical equilibrium, strengths, and theoretical inflation fallacies of the traditional Fed Model.
Author: CMD Wire Institutional Research
Updated: August 2026 • 6 min read
1. Origins of the Fed Model
The Fed Model is a quantitative equity valuation theory popularized by an internal Federal Reserve Humphrey-Hawkins report in 1997. It states that the stock market is in long-term equilibrium when the S&P 500 forward earnings yield equals the nominal 10-Year Treasury yield:
Equilibrium: Forward Earnings Yield (S&P 500) = Nominal 10-Year Treasury Yield
2. Methodological Strengths & Limitations
- Strengths: Simple, intuitive, and explains large-scale capital reallocation between fixed income and equity markets.
- Limitations & Flaws: The model commits the classic economic error of comparing a real asset (corporate equity, where earnings grow with inflation) to a nominal liability (bonds, whose fixed coupons are eroded by inflation).