Equity risk premium dipped below historical averages

Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data from January 1, 1991 to December 31, 2023. Equity risk premium calculated by subtracting the 10-year Treasury yield from the S&P 500 Index earnings yield (trailing 12-month earnings/price). The S&P 500 Index is a market-capitalization-weighted index considered representative of the U.S. stock market. An index is unmanaged and not available for direct investment. Yields represent past performance and fluctuate with market conditions. Current yields may be higher or lower than those quoted above. Past performance is no guarantee of future results. Investing in stocks involves risk and their returns and risk levels can vary depending on prevailing market and economic conditions. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate.

Key Takeaways

  • The equity risk premium has declined and recently reached multi-decade lows as interest rates have increased at a faster pace than the S&P 500 earnings yield.
  • At these levels, stocks are not as attractive versus bonds, especially considering the deteriorating macro and earnings environment we forecast.