Negative Equity Risk Premium

Apollo Chief Economist

Calculating the equity risk premium using trailing earnings and forward earnings shows that stocks are at their least-attractive levels in 20 years relative to bonds, see charts below.

The equity risk premium measures the return in the stock market minus the return of the risk-free rate, and it tells investors something about equity returns relative to fixed-income returns.

In the equity risk premium formula, equity returns are normally calculated by looking at the S&P500 earnings yield, i.e., the inverse of the P/E ratio. Using forward earnings expectations can be misleading when the consensus expects a 55% chance of a recession, so another variant is to look at the S&P500 earnings yield using trailing earnings.

Either way, the bottom line is that with 10-year interest rates close to 5%, the stock market today is more unappealing than it has been in 20 years, see again charts below.

Stocks are unattractive to bonds per the difference between the trailing earnings yield and the10-year Treasury yield.
Source: Bloomberg, Apollo Chief Economist
Stocks are unattractive to bonds per the difference between the trailing earnings yield and the10-year Treasury yield.
Source: Bloomberg, Apollo Chief Economist

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