The risk premium for holding stocks over bonds is vanishing

Investors are piling into stocks at a feverish pace. But by one measure, equities look as unattractive as they did after the dot-com bubble burst.

- Hannah Erin Lang

The gap between market yields on S&P 500 and bonds is thin.

(BLOOMBERG)

That metric is the equity risk premium, often defined as the gap between the S&P 500’s earnings yield—the profit companies generate relative to stock valuations, expressed as a percentage—and that of the 10-year Treasury note. In recent weeks, it has nearly disappeared and is hovering among its lowest levels since the start of the new millennium.

In other words, a rough gauge of stocks’ expected returns is now only slightly higher than what ultrasafe government bonds will produce.

The primary culprit: a global bond rout powered by inflation fears that has pushed Treasury yields higher. The Iran conflict and the closure of the Strait of Hormuz have lifted the price of oil roughly 60% this year and drastically altered investors’ expectations for interest-rate cuts, once considered a given in 2026. President Trump said this weekend that the U.S. and Iran were nearing a pact that would reopen the strait, though mediators said that progress toward a deal slowed on Monday.

As hopes for rate cuts faded, bond yields moved higher. The yield on the 10-year note settled at 4.57% Friday, up from 3.96% just before the U.S. and Israel launched strikes against Iran in late February.

Inflation concerns in the bond market have ramped up even as the mood among stock investors turned practically ebullient, despite stock valuations that still look a bit pricey compared with history. The earnings yield for the S&P 500—based on projected earnings over the next year—has dropped in recent weeks as share prices jump and Wall Street revs up a weekslong stock-buying spree.