As the S&P 500 continues its upward trajectory since late 2022, its earnings yield has declined significantly, falling from nearly 6% to the current 3.8%—a level now below the yield of the 10-year Treasury. This shift signals a potential end to more than two decades of a positive equity risk premium for the S&P 500. In essence, for investors to justify taking on additional equity market risk, expected returns should exceed the risk-free rate, such as that provided by the 10-year Treasury yield.
The current negative equity risk premium raises critical questions about the relative appeal of S&P 500 investments versus Treasuries. Could this imply that the S&P 500 is now excessively overvalued, and would Treasuries, with their “risk-free” status, present a more attractive option?
EquityRiskPremium, #SP500, #TreasuryYield, #StockMarket
