Equity

<div class="textg" style="text-align: justify; font-weight: lighter; line-height: 1.3em; font-size: 15px; border-radius: 3px; color: #80909a; padding: 10px; background-color: #F4F6F9; margin-bottom: 15px;">
 Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our&nbsp;<a href="https://tokenist.com/terms-of-service/" style="text-decoration:underline;color:#3c7b7b" target="_blank" rel="noopener noreferrer nofollow" class="deco-link">website policy</a>&nbsp;prior to making financial decisions.
</div>
<p class="has-drop-cap">US Treasury yields have been hitting record highs lately as the Federal Reserve’s hawkishness puts<a href="https://tokenist.com/bonds-with-10-years-maturity-have-plunged-46-since-may-2020-as-rout-continues/" rel="noopener noreferrer nofollow" class="deco-link"> bonds under severe pressure</a>. Surging yields have also eroded<a aria-label="eroding the equity risk premium (opens in a new tab)" href="https://www.wsj.com/finance/stocks/how-surging-yields-brought-the-stock-rally-to-a-halt-in-8-charts-64a46797?mod=latest_headlines" target="_blank" rel="noopener noreferrer nofollow" class="deco-link"> the equity risk premium</a> to a 20-year low, a measure used by investors to gauge the stocks’ return potential compared to bonds.&nbsp;</p>
<h3 id="bond-market-rout-deepens-amid-fed-s-hawkishness">Bond Market Rout Deepens Amid Fed’s Hawkishness&nbsp;</h3>
<p>A rout in government bond markets has been taking a fresh downturn recently, pushing benchmark US yields to the highest level in 16 years. The yield surge comes as investors reacted to the Federal Reserve’s ‘<a aria-label="higher for longer’ rates narrative (opens in a new tab)" href="https://www.imf.org/en/Blogs/Articles/2023/10/10/higher-for-longer-interest-rate-environment-is-squeezing-more-borrowers" target="_blank" rel="noopener noreferrer nofollow" class="deco-link">higher for longer’ rates narrative</a>, which could restrict economic growth and weigh on appetite for risk assets like stocks.&nbsp;</p>
<p>The Fed and other global central banks have been hiking interest rates almost non-stop since March 2022 to bring down record-high <a href="https://tokenist.com/investing/how-to-hedge-against-inflation/" rel="noopener noreferrer nofollow" class="deco-link">inflation</a>. Despite this particularly hawkish campaign, inflation stood at 3.7% in August, notably higher than the central bank’s 2% target.</p>
<p>In addition, the US labor market also remains red hot, with the latest data revealing that the <a href="https://tokenist.com/stock-futures-dip-as-nfp-data-shows-labor-market-still-hot/" rel="noopener noreferrer nofollow" class="deco-link">US added 336,000 jobs in September</a>, nearly twice the economists’ projection of 170,000. Given these circumstances, the Fed pledged to keep interest rates high for longer.&nbsp;</p>
<p>These warnings exacerbated the bond market downturn, propelling yields to multi-year highs. Moreover, this upswing also battered the equity-risk premium – a measure of the reward for holding stocks over government bonds – pushing it to a 20-year low.&nbsp;</p>
<div class="cta-referral"><img src="https://tokenist.com/wp-content/themes/thetokenist/assets/img/del/cta-referral-1.png" alt="" class="cta-referral__img" loading="lazy" decoding="async">
 <div class="cta-referral__text">
  <p>Join our&nbsp;<a href="https://t.me/thetokenist" target="_blank" rel="noopener noreferrer nofollow">Telegram group</a>&nbsp;and never miss a breaking digital asset story.</p>
 </div>
</div>
<h3 id="stocks-low-return-potential-could-push-investors-toward-bonds">Stocks’ Low Return Potential Could Push Investors Toward Bonds</h3>
<p>Notably, the earnings yield of the S&amp;P 500, which reflects expected profits for the next year, was only 0.766 percentage points higher on Friday compared to the yield on the 10-year Treasury. According to Dow Jones Market Data, this represents the smallest gap between stock returns and safer bonds since June 2002.</p>
<p>The slump in the equity-risk premium could encourage investors to rotate away from equities into less-risky bonds and ultimately put downward pressure on stock prices in the short term.&nbsp;</p>
<p>The number of stocks tracked by the S&amp;P 500 index hitting new intraday 52-week lows recently hit the highest since October 2022. Meanwhile, the portion of stocks trading above their 50-day moving averages is at its lowest in a year, Dow Jones Market Data showed.&nbsp;</p>
<p>Remarkably, the bulk of S&amp;P 500’s gains this year were <a href="https://tokenist.com/most-of-sp-500s-gains-driven-by-7-firms-others-up-less-than-5-ytd/" rel="noopener noreferrer nofollow" class="deco-link">fueled by so-called “Magnificent Seven” companies</a> thriving on the ongoing artificial intelligence (AI) boom. These stocks collectively soared over 50% year-to-date, while the remaining 493 stocks within the benchmark index gained about 5%.</p>
<div class="cta-sub js__cta-sub">
 <div class="cta-sub__start" data-step="1">
  <div class="cta-sub__title"><strong>Finance is changing.</strong>
  </div>
  <div class="cta-sub__subtitle">
   Learn how, with Five Minute Finance.
  </div>
  <div class="cta-sub__excerpt">
   A weekly newsletter that covers the big trends in FinTech and Decentralized Finance.
  </div> <button type="button" class="btn">Try it out (for free)</button>
 </div>
 <div class="cta-sub__form" data-step="2" style="display: none;">
  <script type="text/javascript" src="https://app.getresponse.com/view_webform_v2.js?u=QcLhh&amp;webforms_id=zw3Wv"></script>
 </div>
 <div class="cta-sub__result" data-step="3" style="display: none;">
  <div class="cta-sub__title">
   Awesome
  </div>
  <div class="cta-sub__caption">
   You’ve subscribed.
  </div>
  <div class="cta-sub__greeting">
   You’re well on your way to being in the know.
  </div>
 </div>
</div>
<p><em><strong>Considering the current macro climate, do you think US equities are set for a significant pullback? Let us know in the comments below.&nbsp;</strong></em></p>
<p>The post <a rel="noopener noreferrer nofollow" href="https://tokenist.com/dwindling-equity-risk-premium-can-lead-to-a-severe-stock-pullback/">Dwindling Equity Risk Premium Can Lead to a Severe Stock Pullback</a> appeared first on <a rel="noopener noreferrer nofollow" href="https://tokenist.com">Tokenist</a>.</p>

Dwindling Equity Risk Premium Can Lead to a Severe Stock Pullback

Table of Contents

Tokenist

Other articles published on Oct 10, 2023

CySEC to become regulator of crypto firms in Cyprus

The Power of Human-Machine Collaboration in AI

Immutable Partners with Amazon Web Services to Support Blockchain Gaming

FCA Released Warning List, Many Crypto Exchanges Joined

Investors Show Interest in Hot Cryptos, Including Bancor, Cartesi, and Holo, Amid Mixed Bitcoin P...

VanEck Warns of Serious Issues with Avalanche, Ethereum’s Biggest Competitor

Join our free newsletter for daily crypto updates!