Line chart showing changes in equity risk premium.
Y-axis: Equity risk premium (%); X-axis: 1962-2022
Average premium for this period was about 0.54%.
Equity risk premium was positive for roughly three periods and negative for two periods.
- March 1962-May 1968, positive, ranging from just over zero to over 2.6%. Peaks in July 1962 and December 1966.
- April 1969-October 1973, negative, ranging from just under zero to near minus 1.6% (July 1971).
- October 1973-August 1980, generally positive, ranging from just over zero to over 6.2% (December 1974).
- September 1980-June 2002, generally negative, ranging from just below zero to over minus 5%. Negative spikes in August 1981 (negative more than 4.2%), May 1984 (negative more than 4.8%), September 1987 (negative more than 5%), April 1992 (negative near 3.8%), and January 2000 (negative more than 3%).
- July 2002-February 2022, positive, ranging from just above zero to near 6%. Peaks at February 2009 (over 5.2%), September 2011 (about 6%), and March 2020 (near 5%).
Premium in February 2022 was over 2.6%.
Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data from January 1, 1962 to March 31, 2022. Equity risk premium calculated by subtracting the 10-year Treasury yield from the S&P 500 Index earnings yield. 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.
- Equity risk premium has increased after falling to its lowest level in the past decade last year.
- Today’s positive equity risk premium signals expectations for a positive return over the next 12 months.