U.S. stocks overvalued as equity risk premium hits lowest point in 25 years

From Investing.com: 2025-01-13 02:17:23

The divergence between U.S. stocks and bonds is reaching extreme levels, prompting investors to reconsider their exposure. The equity risk premium (ERP) is at its lowest in almost 25 years, signaling overvaluation in stocks. If the 10-year Treasury yield continues to rise, the ERP could shrink even further, making bonds more appealing.

Equity strategists warn that a 5.00% 10-year yield could push the ERP into “unhealthy territory,” signaling a buy opportunity for bonds. The current uncertainty surrounding U.S. fiscal and monetary policy adds complexity to portfolio adjustments. The recent decline in the ERP is driven by rising bond yields, indicating bonds may become more attractive relative to stocks.

In the past, spikes in the ERP have coincided with market lows, suggesting that the recent decline could signal a shift towards bonds. A 5.00% 10-year bond yield may attract buyers, but uncertainty persists regarding the future direction of both stocks and bonds. The unsustainable divergence between yields and equity prices may need to be reconciled.

While signals to buy bonds and sell stocks may be flashing amber, the timing for a shift to green remains uncertain. Portfolio managers are cautious given the current economic and policy landscape. The future direction of both asset classes depends on a variety of factors, making investment decisions complex and challenging.



Read more at Investing.com: Sinking U.S. equity risk premium rings alarms: McGeever By Reuters