The Fed model has the following weaknesses:

• Compares a real variable to a nominal variable. The S&P 500 earnings yield will not automatically adjust to incorporate changes in inflation and could be considered real. The yield on a treasury is adjusted to incorporate changes in inflation and is thus considered nominal.
• Ignores the equity risk premium. Assuming the yield on treasuries is the same as the earnings yield on the S&P ignores the inherent risk of equities.
• Ignores earnings growth. Growth expectations affect earnings, but treasury yields have no growth components. By assuming the yield on a treasury should be the same as corporate earnings yield, the model implicitly assumes zero growth in earnings.