Zero equity risk premium pressures US stocks
The bear case argued for US equities is that a zero equity risk premium relative to bonds makes stocks highly unattractive on a risk-adjusted basis.
The argument
The guest noted that with a CAPE multiple around 38, the real yield on the stock market is 2.7%, matching the real yield of the 30-year Treasury bond. This implies investors are not being compensated for taking on equity risk, effectively pricing stocks as riskless assets.
The thesis, stress-tested
✓ What validates it
- ✓CAPE multiple begins to contract toward historical means
- ✓Equity risk premium widens as stock yields rise relative to bond yields
▸ Risks discussed
- ▸A prolonged period of irrational exuberance could keep multiples elevated
- ▸Corporate earnings growth could accelerate beyond expectations
Hear it yourself
"How sustainable is that? What are the implications of that? What are the especially the social implications? And this is don't forget, we're in the early stages, of this, of this tech cycle. Maybe early, maybe mid, but we haven't seen all the fallout yet, on the labor market. We're seeing some signs of it. I mean, you go to the Challenger layoff data, I mean, you'll see that over a 100,000 since last summer, over a 100,000 job layoff announcements have been due to AI. That didn't exist before. Yep. You go to the University of Michigan consumer sentiment survey."
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