Equity risk premium approach to deciding if market is overvalued
Uses a forward looking approach to impute an expected future equity risk premium. Concludes S&P is overvalued by 12%. Further breaks down into 4 scenarios
Low interest rates, earning expectations met ==> undervalued by 20% | earning expectations not met: overvalued by 20% Slowly raising interest rates, earning expectations met ==> overvalued by 6.5% | earnings not met: overvalued by 30% Interest rates raise quickly, earning expections met ==> overvalued by 13% | earnings not met: overvalued by 40%
Overall, I think low interest earning expectations met scenario seems likely based on gut feeling.
I know that the possibility of additional economic stimulus may improve the odds for the economy, but can they do so without affecting rates? To buy into that scenario, you have to belief that the Fed has the power to keep rates low, no matter what happens to the economy, and I don't share that faith.