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To illustrate the huge impact of a higher rate, consider what the S&P 500’s SPX, +1.44% fair value would be under several discount rate assumptions. The calculations, which are summarized in the table below, were conducted by Vincent Deluard, head of global macro strategy at INTL FCStone.

Given his assumptions, the S&P 500 would have been fairly valued at its Feb. 19 high if we assume a discount rate of 6.2%. If we instead assume a discount rate that is equal to the long-term average, then the S&P 500’s fair value falls to 1,851 — 45% lower than its Feb. 19 high.

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