The Extra Reward for Owning Stocks Over Bonds Has Disappeared

Little sign of crimped demand for equities among individual investors, who remain bullish after 2 years of gains

- Hannah Erin Lang

Stocks haven't looked this unattractive, by at least one measure, since the aftermath of the dot-com era. Plenty of investors are piling in anyway.

The equity risk premium, often defined as the gap between the S&P 500's earnings yield and that of 10-year Treasurys, turned negative in late December for the first time since 2002 and sat last week at negative 0.15 percentage point.

The metric is based on a calculation of how much stocks yield, which is derived by dividing the stock market's expected earnings by its price. The earnings yield is then compared with the yield on government debt. The difference between stock and bond earnings yields shows how much investors are compensated for the additional risk of owning stocks over relatively risk-free government bonds.

Over the long term, stocks need to promise a higher reward than bonds. If not, the safety of Treasurys would outweigh the risks of stocks losing some, if not all, of investors' money.

In recent weeks, a combination of higher Treasury yields and soaring equity valuations pushed the equity risk premium into the red. That could pose a threat to the recently rekindled stock rally.

In reality, though, there has been little sign of crimped demand for equities among individual investors, who remain bullish after two years of blockbuster gains.

"I think you get what you pay for," said Mike Ugino, a 73-year-old retired surgeon in Columbia, S.C. High valuations haven't deterred him from scooping up more shares of Robinhood Markets, Nvidia and Intuitive Surgical in recent weeks.