Line graph showing the equity risk premium from January 1991 to March 2024. The average equity risk premium is 1.1%. The equity risk premium was predominantly above average from 1962 – 1967, 1974 – 1980, and 2002 – present, and predominantly below average from 1967-1974 and 1980 – 2002. The equity risk premium was -0.2% in March 2024.
Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data from January 1, 1991, to March 31, 2024. 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. Forecasts are based on certain assumptions and on views of market and economic conditions which are subject to change.
Key Takeaways
- The equity risk premium has declined and recently reached multi-decade lows as interest rates have increased while the S&P 500 Index earnings yield has declined.
- At these levels, stocks are not as attractive versus bonds, especially considering the slowing macro and modest earnings environment we forecast.