The Yardeni model for estimating the equilibrium earnings yield (i.e., the fair earnings yield) is based on a variation of the constant growth dividend discount model (CGM), in which investors value total earnings rather than dividends:

We can restate the CGM to show that the earnings yield must be the difference between the required return on equity and expected long-term growth. This is logical, since we assume the total return on equity, r, must be the sum of the earnings yield, E₁ / P₀, and growth (i.e., capital gains), g:

Yardeni incorporates risk into his model by using the yield on A-rated corporate bonds, Y_B, as the required return on equity, r. The difference between the yields on A-rated corporates and risk-free treasuries serves as a proxy, although most likely understated, for the equity risk premium. Also, instead of the long-term growth assumed in the CGM, Yardeni uses a 5-year growth forecast, LTEG, for the S&P 500. The model becomes:

The Yardeni model can be applied as a ratio: