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2026-09-16 19:36:11
[Rising Yields Weaken Equity Attractiveness] ⑴ Recent surges in bond yields have continued to suppress the premium investors receive for holding stocks rather than bonds. ⑵ This premium, known as the equity risk premium, is thin, meaning the market may at some point feel that it is not adequately compensated for bearing stock market volatility. ⑶ The equity risk premium is not directly observable and exists in various versions. The proxy indicator used here is sometimes called the yield gap, which is calculated by subtracting the inflation-adjusted 10-year Treasury yield of 2.60% from the S&P 500's earnings yield of approximately 5.2%. ⑷ JPMorgan analysts noted in a report last week that the current low equity risk premium level typically coincides with periods when stocks are more sensitive to changes in Treasury yields. ⑸ They wrote that this increased sensitivity to bond yields, especially if real interest rates rise further from current levels, could prompt multi-asset investors to increase their bond allocations, and the flow of funds from stocks to bonds could be more pronounced than in recent years. (6) On the other hand, it is worth noting that equity risk premiums have been near multi-decade lows for about two years, yet investors have not suffered significant losses, as continued excitement about potential returns from AI has kept them in the stock market. (7) Going forward, attention should be paid to the direction of real interest rates and whether the AI narrative can continue. If yields continue to rise while earnings expectations fail to keep pace, the balance between stock and bond allocations may gradually shift.
