Goldman Sachs told its clients to ignore a widely-followed way to value the stock market used by Warren Buffett.
"With interest rates near multi-century lows, the so-called 'Fed model,' which compares earnings yields to bond yields, retains a powerful grip on the 'valuation narrative' in the equity market," strategist Charles Himmelberg wrote in a note to clients Wednesday. "But yield comparisons across equities and bonds are a flawed metric."
The strategist cited how the 10-year Treasury yield is at 2.2 percent and the S&P 500 earnings yield is currently at a more attractive 4.3 percent on the surface. The earnings yield is calculated by taking earnings per share for the index as a whole and dividing it by the price.
However, Himmelberg noted the valuation model doesn't include any adjustments for future inflation and corporate earnings growth.