US Equity Risk Premium: Rebound Ahead

The unprecedented interest-rate hikes by the Federal Reserve have driven Treasury yields to their highest levels in over 15 years, while investors’ optimism amid robust economic activity has resulted in more than 50% gains in the S&P 500 during the ongoing bull run. Consequently, the US Equity Risk Premium (ERP), a measure of the extra return investors gets for holding equities over bonds, has plunged to a 23-year low.

What does this mean for investors? In this analysis, we explore this question by examining key macroeconomic indicators like inflation and unemployment. Dive into our scenario analysis, uncover the driving forces behind bond yields and earnings yield, and discover where the S&P 500 could go when ERP mean reversion occurs.