Deep Store

The classic "Fed Model" valuation spread: `(100 / SP500_PE_TTM) − DGS10`. Trailing earnings yield minus the nominal 10-year Treasury yield. Older, more famous, and more widely-referenced in market commentary than ECY — but asks roughly the same question.

Why it matters: Puts equities and bonds on the same income-comparison axis. Positive spread = stocks are paying more (in earnings yield) than bonds (in coupon) — historically a bullish lens. Negative spread = bonds yielding more than equity earnings — historically associated with elevated equity valuation. Greenspan-era Fed staff popularized the concept in the 1990s as a quick read on whether "TINA" (there is no alternative) was justified.

How to read it: Long-run average is positive — equities almost always yield more than bonds. Crossing into negative is meaningful and rare; it was a feature of the dot-com peak (1999-2000), and parts of the post-2022 era as bond yields climbed faster than P/E compressed. Sustained negative spreads have historically preceded multi-year poor equity returns. Compare with ECY — Fed Model uses *nominal* bond yields (so it's hot when inflation is hot), ECY uses *real* yields (so it strips inflation noise). Both are useful; they say slightly different things.

Caveats: The Fed Model has been criticized for comparing nominal bond yields with real-ish earnings yields (since corporate earnings grow with inflation while bond coupons don't). That's a reasonable critique — it's why Shiller built ECY. But the Fed Model is still what 90% of market commentary references, so you need both.