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January 6, 2003
Topical
Study
#58
All disclosures can be found on the
back page.
Dr. Edward Yardeni
(212) 778-2646
ed_yardeni@prusec.com
STOCK VALUATION
MODELS (4.1)
R e s e a r c h
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12/27
Figure 1.
STOCK VALUATION MODEL (SVM-1)*
(percent)
Overvalued
Undervalued
* Ratio of S&P 500 index to its fair value (i.e. 52-week forward consensus expected S&P 500 operating
earnings per share divided by the 10-year U.S. Treasury bond yield) minus 100. Monthly through March 1994,
weekly after.
Source: Thomson Financial.
Yardeni
Stock Valuation M
odels
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January 6, 2003
R E S E A R C H
Stock Valuation Models
January 6, 2003
3
I. The Art Of Valuation
Since the summer of 1997, I have written three major studies on stock valuation and numerous
commentaries on the subject.1 This is the fourth edition of this ongoing research. More so in
the past than in the present, it was common for authors of investment treatises to publish
several editions to update and refine their thoughts. My work on valuation has been acclaimed,
misunderstood, and criticized. In this latest edition, I hope to clear up the misunderstandings
and address some of the criticisms.
I do not claim to have invented a scientific method for determining the one and only way to
judge whether the stock market is overvalued or undervalued. Rather, my goal is to provide
variations of a stock valuation model that can generate useful monthly and even weekly
guidelines for judging the valuation of the stock market. Nevertheless, I believe valuation is a
subjective art much more than it is a mathematically precise objective science.
In my earlier work, I focused on developing empirical methods for valuing the overall stock
market, not individual stocks.