Market Valuation

Key Takeaways

We use a residual income model to compute an intrinsic value for the market. This model considers forecasts for future earnings and for long-term earnings growth to estimate the equity risk premium for the S&P 500.We combine the equity risk premium with the risk-free rate to produce an equity yield, and compare the equity yield to the yield on investment grade bonds to classify the market as undervalued, overvalued or fairly-valued.When the equity market is overvalued relat...

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