after being written off as irrelevant for much of the past decade the equity risk premium a gauge of the potential reward investors might reap from buying stocks has fallen to its lowest level since 2007 to some this means us stocks are no longer worth the risk now that investors can reap returns of 5 or more by buying shortdated treasurys and other highgrade bonds in the years that followed the financial crisis many investors disregarded the erp as us stocks moved reliably higher their valuations bolstered by rockbottom interest rates imposed by the federal reserve some investors had a name for this phenomenon tina which stands for “there is no alternative” meaning that with bond yields so low investors were highly motivated to put their money to work in the stock market now the situation has reversed as inflation and expectations of a more difficult economic environment weigh on expectations for corporate profits the nearly guaranteed returns offered by treasurys has soared this means the equity risk premium is once again finding use as a gauge of relative value for stocks since it can offer helpful insights about what investors stand to gain over the short term by taking the additional risk that comes with buying stocks or investing in stock funds methods for calculating the erp vary some economists like to include measures of inflation in their calculation to produce what’s known as the “real” equity risk premium “real” in this case means the figure is adjusted for inflation which is subtracted from the bond yields used in the equation how to calculate the equity risk premium others simply use analysts’ forecasts for how much profit sp 500 companies are expected to earn over the coming 12 months as of friday’s close the equity risk premium stood at 17 according to factset data investors can arrive at this figure by taking wall street’s projected earnings per share over the next year for the sp 500 in this case 22168 according to factset data and divide it by the level of the sp 500 which stood at around 3970 as of friday’s close the result is multiplied by 100 to arrive at roughly 56 investors then subtract the current riskfree rate in this case the 10year treasury yield which stands at 3920 to reach the final figure “that’s not that much” said liz young head of investment strategy at sofi who spoke with marketwatch after sharing a chart of the erp on twitter “basically what it’s telling you is you have to pay a lot for this level of risk” young said referring to us stocks “it’s not a great entry point for a lot of different reasons” what does this mean for the market while a low erp might be good news for bonds it could also mean that investors willing to wait out the tumult might walk away with a good deal that’s because historically a low erp is correlated with recessions and bear markets according to former new york fed economist fernando duarte who wrote about the erp in a 2015 paper and in a new york fed blog post from december 2020 although the us economy isn’t in a recession as us gdp growth remains robust the sp 500 did enter bearmarket territory last year the largecap index is still down roughly 17 from 479656 its record high reached jan 3 2022 according to factset meanwhile investors looking to outperform the broader market will need to be more discerning when deciding which stocks to buy young and others expect firms with resilient business models low debt and the ability to continue generating cash even when the economy shudders to prevail “knowing how certain companies make their profits and how resilient those profits or cash flows are will be key” said callie cox us investment analyst at etoro during a phone interview with marketwatch steve eisman the former hedge fund portfolio manager who shot to fame thanks to “the big short” said monday that he’s buying bonds “for the first time in a long time” even as tech stocks have led a market rebound since the start of the year eisman believes the days of banking marketbeating returns by investing in tech stocks are over us stocks bounced on after suffering their biggest weekly drop of the year on friday the sp 500 spx was up 05 monday afternoon in new york after finishing the week down 27 on friday according to factset data the dow jones industrial average djia was up 57 points or 02 treasury yields meanwhile pulled back slightly but the 10year yield tmubmusd10y is still on the cusp of crossing above 4 for the fist time since last fall it stood at 3920 monday down 2 basis points on the day