JPMorgan: Equity Risk Premium Falls to Lowest Since 2002 - FJElite

The sharp rise in real bond yields, combined with the equity rally, has pushed the estimated S&P 500 equity risk premium down to around 2.1%, below the previous cycle low of 2.4% seen in 2007 and the lowest level since 2002. This means the expected real return advantage of equities over bonds has narrowed significantly.

The estimate is derived by comparing the S&P 500’s implied equity discount rate with the 10-year real Treasury yield. Because equity discount rates are not directly observable, they are inferred using a long-term fair value model based on the Dividend Discount Model, which estimates the return investors require from equities based on expected future cash flows.