Equity Risk Premium

The Equity Risk Premium is the extra yield investors get for holding stocks over a 10-year Treasury — measured here as the Shiller earnings yield (1/CAPE) minus the 10-year Treasury rate. When it's compressed near zero, you're being paid almost nothing for taking equity risk over a bond yielding the same; when it's wide, stocks offer real compensation for the volatility. CAPE and the Buffett Indicator both look at price relative to fundamentals, but they miss the cross-asset story: a stretched CAPE is far less dangerous when bonds yield 1% than when bonds yield 5%. ERP is the lens that adds the rate environment to the valuation conversation. Readings have run compressed (and outright negative on some monthly prints) since 2023 — comparable to the 1996-2000 dot-com run and the late-1960s Nifty Fifty era before it. That's the historical comp worth knowing: low-ERP regimes have ended in extended bear markets (2000-02, 1969-74), but they've also persisted for 4+ years before doing so, which means this is a long-run return-expectation signal, not a timing trigger. The right reading is "if ERP is near zero, expect modest forward equity returns over the next 5-10 years" — not "sell now." Anyone who shorted on a compressed ERP signal in 1996 got destroyed before being eventually right. One caveat worth carrying: this is the simple Fed-model version, which has well-known flaws (no growth adjustment, mixes a current-earnings yield against a 10-year nominal bond). The growth-adjusted version Aswath Damodaran publishes monthly reads materially higher right now (around the long-run median) because it bakes in expected earnings growth and buybacks. The gap between the two is the bull/bear argument in a single number — bears point to the line on this chart, bulls point to Damodaran. If you only believe one, the rating here is too bearish; if you only believe the other, it's too sanguine. The honest answer is that both are valid and the truth sits between them.