Can someone please help clarify – why would a higher LTEG (long term earnings growth rate) lead to a lower earnings yield under the Yardeni model? I can’t really wrap my mind around why a a higher growth rate would result in a lower earnings yield… Please help! Many thanks.
You may show Yardeni as ratio:
Expected EPS / Corp.bond yield - d (LTEG) if > 1 stocks are undervalued
If everything else is constant, higher LTEG would decrease a value of denominator and stocks are more undervalued (or less overvalued).
High growth prospects lead to high market value (High P), hence decreasing the earnings yield. Remember that yields improve when market values decrease and earnings factors remain stable.