Det nuværende aktieniveau er stadig attraktivt, især når det sammenholdes med obligationerne, skriver Merrill i en analyse, hvor Merrill fokuserer på risikopræmien over for obligationerne. I dag er der et spread mellem S&P 500 og 10-årige T-bonds på 4,0 pct. Det ligger over det langsigtede snit på 3,3 pct., men under niveauet på 6,7 pct. den 23. marts, da markedet var lavest.
A Quick Study of the Equity Risk Premium
There are various measures of valuation that investors can use to evaluate whether
equities are cheap or expensive. The popular P/E or price-to-earnings ratio measures
current price levels relative to earnings. Similarly, other metrics compare price to cash
flows, sales, book value, etc.
One drawback of these absolute metrics is that they don’t take into account the level of interest rates in the economy, which is especially relevant today given historically low rates. This is where the equity risk premium (ERP) proves useful.
The ERP compares the earnings yield of equities, which is the ratio of earningsto-price (the inverse of the P/E ratio) to a risk-free interest-rate such as the 10-year Treasury yield. A higher ERP makes equities more attractive relative to fixed income. The intuition is that assets compete with each other for investor dollars, and the marginal dollar should prefer one with better yield and/or growth.
Investors expect to be rewarded with higher returns, or a premium, for accepting
additional risk. ERP essentially quantifies the excess return above the risk-free rate that
investors command for owning stocks. A higher ERP suggests that investors demand a
larger premium to hold stocks relative to less risky assets, like bonds, while a lower ERP
indicates less risk-aversion to equities, boosting valuations. From an asset allocation
perspective, an investor should consider assets possessing higher risk premiums,
inferring they’re being compensated for taking additional risk.
Currently, the spread between the S&P 500’s earnings yield and the 10-year Treasury
yield is 4.0%,1 which represents the 80th percentile of its historical range and is
above the long-term average of 3.3%. This is substantially less than its recent peak
of 6.7% (99th percentile) on March 23 but still indicates that equities are attractively
compensated for risk relative to bonds (Exhibit 4a). Since 1990, the S&P 500 has
generated positive returns over one and three years after each time it breached the 95th
percentile (Exhibit 4b).