Another argument often mentioned in favor of the Fed model is the present value of stocks should be equal to the sum of its discounted future cash flows.

http://en.wikipedia.org/wiki/Fed_model

Present value

Another argument often mentioned in favor of the Fed model is the present value of stocks should be equal to the sum of its discounted future cash flows. The government bond rate can be seen as a proxy for the risk-free rate. When the government bond rate falls, the discount rate falls, and the present value rises. And this implies that when interest rates fall, E/P also falls.