Authored by Lance Roberts via RealInvestmentAdvice.com,
💰 Equity Risk Premium Has Vanished, And Stocks Aren’t Cheap.
Last week’s Q4 market outlook laid out why the calendar, earnings, and buybacks lean bullish into year-end. I still think that. But one line in that report deserved more than a sentence. With the 10-year above 5%, Treasuries now offer a “risk-free” return that stocks haven’t matched since 2002. So this week, I rebuilt that claim from the raw data. The equity risk premium, the extra return investors demand for owning stocks over bonds, is the thinnest it’s been in a generation. What history says happens next is the more interesting part.
The Equity Risk Premium Has Turned Negative
The simplest version of the math compares what the S&P 500 earns with what a Treasury note pays. At Tuesday’s record close of 7,818.93, the index traded at about 27 times trailing as-reported earnings, according to Robert Shiller’s data. ChartRow’s independent count is 26.4. Either way, that’s an earnings yield of roughly 3.7%. The 10-year closed at 5.31% on Monday. In other words, every dollar in the index currently “earns” about 1.6 percentage points less than a dollar parked in a government bond.
Notice in the chart above how rarely the spread sits this far belo
