US stock markets have surged to their highest valuations relative to government bonds in decades, fueled by investor enthusiasm for large-cap tech companies. This has led to a decline in the equity risk premium, a measure of the extra return investors demand for holding stocks, reaching its lowest level since the dotcom bubble. While some analysts argue that high valuations are justified by strong economic growth and corporate profits, others warn of overvaluation and potential market risks.
US equities have soared to their most expensive level relative to government bonds in a generation, amid growing nervousness among some investors over high valuations of megacap technology companies and other Wall Street stocks. A record-breaking run for US equities, which hit a fresh high on Wednesday, has pushed the so-called forward earnings yield — expected profits as a percentage of stock prices — on the S&P 500 index down to 3.9 per cent, according to Bloomberg data.
Given that profit margins are above their historic average, if they were to “revert towards their historic norms, earnings growth could end up being very weak”, he said. Some market watchers look to altogether different measures. Aswath Damodaran, professor of finance at the Stern School of Business at New York University, is sharply critical of the Fed model and said the right way to compute the equity risk premium was to use expectations of cash flows and cash payout ratios.
Equities Bonds Valuation Risk Premium Technology Stocks
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