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Great chart from Bloomberg this week that illustrates one of the main points I have been making. The negative equity risk premium (stocks expensive compared to bonds) hasn’t been this bad in over 20 years, when we were starting to unwind from the tech bubble.

“The equity risk premium … is hovering around its lowest point since 2002 … The S&P 500 has averaged a 12-month return of only 2.5% over the past three decades when the risk premium has stood around current levels.”

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The lower the equity risk premium, the lower the future expected returns on stocks has been historically. The above chart shows the ERP on a more recent time frame. It’s entirely possible we are underestimating the future effect of AI, but history shows below average returns typically follows.

Doesn’t mean you need to go to cash, but I don’t recommend chasing this market and taking on more risk than you can handle. A lot of good has already been priced in.

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