bick2

P/E Ratios and Inflation

If the equity premium model is based on 1/(interest rate) instead of inflation the calculation would predict that the S&P 500 is undervalued by a factor of two.

Now I don't necessarily believe that, but I do think that basing this calculation on inflation rate rather than interest rate is likely to be wrong when the two are different by a factor of two or so like they are now. Equities are valued relative to interest bearing vehicles, after all.

So it looks to me that it would be more correct to state that the S&P 500 looks undervalued relative to cash.