Key insights
- The author's study on excess CAPE yield (ECY) suggests a current implied Equity Risk Premium (iERP) between -3.6% and +1.9%, signaling potentially weak forward returns for stocks. This analysis contrasts with the 2010s, where the same metric indicated attractive equity valuations. The findings challenge the notion that valuations are irrelevant, implying a bearish outlook for US equities based on current risk premium estimates.
I put together a study that I think takes a unique look at the excess cape yield (ECY) and how it relates to the risk premium using historical data.
I've also made a dashboard style chart at the beginning of the post that will update frequently with new data.
The current implied Equity Risk Premium (iERP) is between -3.6% to +1.9%, highlighting very weak expected forward returns for stocks.
It's notable that using this metric actually implied that equity valuations were pretty attractive in the 2010s, and I think helps dispel some of the "valuations don't matter" rhetoric that I've been hearing a little bit more lately.