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Stocks Havent Looked This Unattractive Since 2007

Eric Wallerstein Wall Street Journal

Date Posted:: April 24, 2023
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@EricWallenstein The equity risk premium (ERP) for the S&P 500 has fallen to 1.59pp, its lowest since October 2007, below the average ERP of 3.5pp since 2008.

The equity risk premium (ERP) for the S&P 500, which measures the gap between the earnings yield of stocks and the yield of 10-year Treasurys, has fallen to 1.59pp, its lowest since October 2007. This is significantly below the average ERP of 3.5pp since 2008, indicating that the reward for holding stocks over bonds is at its slimmest since before the 2008 financial crisis. The current ERP is closer to the long-term average of 1.62pp since 1957, suggesting a return to historical norms. However, rising bond yields and a dimming corporate earnings outlook challenge equities' attractiveness. The Federal Reserve's efforts to manage inflation and prevent a banking crisis further cloud the stock market's prospects. Despite these challenges, some analysts argue that high nominal growth supported by inflation could sustain earnings, while others see opportunities in value stocks, which are relatively cheap compared to growth stocks amid current economic conditions.

The S&P 500’s equity risk premium is currently at 1.59pp, its lowest level since October 2007. Since 2008 the mean ERP has been 3.5pp above its post 1957 mean of 1.62pp.

Stocks Havent Looked This Unattractive Since 2007: Extended Excerpt Image 1

“…The equity risk premium—the gap between the S&P 500’s earnings yield and that of 10-year Treasurys—sits around 1.59 percentage points, a low not seen since October 2007. That is well below the average gap of around 3.5 points since 2008. The current equity risk premium is closer to the longer-term norm. The average premium since 1957 is around 1.62 points, BlackRock research shows….”

Eric Wallerstein, "Stocks Haven’t Looked This Unattractive Since 2007,"Wall Street Journal, April 6, 2023, https://www.wsj.com/articles/stocks-havent-looked-this-unattractive-since-2007-78fc374c

Stocks Haven’t Looked This Unattractive Since 2007

The reward for owning stocks over bonds hasn’t been this slim since before the 2008 financial crisis.

The equity risk premium—the gap between the S&P 500’s earnings yield and that of 10-year Treasurys—sits around 1.59 percentage points, a low not seen since October 2007.

That is well below the average gap of around 3.5 points since 2008. The reduction is a challenge for stocks going forward. Equities need to promise a higher reward than bonds over the long term. Otherwise, the safety of Treasurys would outweigh the risks of stocks losing some, if not all, of investors’ money.

Stocks Havent Looked This Unattractive Since 2007: Extended Excerpt Image 2

The allure of stocks dimmed recently when bond yields shot higher and the corporate-earnings picture continued to darken. The Federal Reserve now faces the dual challenge of raising interest rates to cool inflation while reaching into its toolbox to prevent a full-blown banking crisis from erupting—both of which cloud the outlook for stocks.

The S&P 500 has clawed back some of last year’s 19% decline, rising 6.9% in 2023. The Bloomberg U.S. Aggregate Bond index has jumped 4.2%, boosted by an early-year rally and elevated yields.

The S&P 500 added 0.4% on Thursday after employment data pointed to the Fed gaining ground in its battle with the record-hot labor market. Bond yields edged higher.

Bonds are offering a “once in a generation opportunity, but not once in a lifetime,” said Tony DeSpirito, BlackRock Inc.’s chief investment officer of U.S. fundamental equities.

The current equity risk premium is closer to the longer-term norm: The average premium since 1957 is around 1.62 points, BlackRock research shows. That means stocks should still offer a better return than bonds given their historical outperformance, Mr. DeSpirito added.

The equity risk premium falls when bond yields rise, or a stock’s price/earnings ratio jumps—either due to weaker earnings or higher stock prices. The earnings yield, meanwhile, is the ratio of profits from the past year to current stock prices.

October 2007 would turn out to mark a precarious time in markets. Stocks had recently hit their highest level on record, and the federal-funds rate was near its current level at around 4.8%.

Over the following year, the S&P 500 would go on to drop roughly 45%, and the Fed would cut rates to near zero. Bloated stock valuations reset; bond yields cratered. By March 2009 when the stock market bottomed, stocks’ premium over Treasurys had risen above 7 points and a new bull market was born.

Stocks look pricey again today, and markets are facing a new host of challenges. By at least one valuation measure, U.S. equities are currently more expensive than those of any other country or region, Research Affiliates’ data show. That is based on the S&P 500’s price level relative to inflation-adjusted corporate earnings over the past 10 years, or the CAPE ratio. Although well off prior peaks seen in the late 1990s and 2021, the U.S. stock benchmark trades at a multiple around 29, pricier than it has been more than 90% of the time since 1881.

Stocks Havent Looked This Unattractive Since 2007: Extended Excerpt Image 3

Valuations have historically plummeted during economic recessions, though some analysts say lofty valuations won’t prevent stock prices from continuing to rise.

“We have seen the peak for stock-market valuations, but that doesn’t necessarily mean we’ve seen peak prices yet in this cycle,” said Jawad Mian, founder of macro-advisory firm Stray Reflections.

The economy is much more resilient to high interest rates than it has been in the past, said Mr. Mian. High nominal growth—boosted by inflation—will continue to support earnings more than Wall Street’s consensus currently sees, preventing a significant drop in stock prices, he said.

Analysts expect earnings among companies in the S&P 500 to edge up roughly 1.6% in 2023, according to FactSet. At the end of last year, they were calling for a 5% increase.

Since 1957, equities have beaten out fixed income more than two-thirds of the time when they were held for at least a year, BlackRock research shows. Stocks’ favorability improves as holding periods lengthen.

Focusing on stocks’ slim risk premium misses part of the picture, Mr. DeSpirito of BlackRock says. Fed intervention—suppressing short-term rates and buying up long-term bonds—created an abnormal risk-reward profile for stocks after the 2008 financial crisis. He encourages investors to seek stocks with resilient margins and strong earnings growth, while avoiding overvalued companies.

Some investors say frothy valuations mean value stocks—those trading at a discount to their book value, or net worth—warrant consideration.

Value stocks are “dirt cheap” relative to growth, now more discounted than they have been four-fifths of the time in U.S. stock-market history, according to Rob Arnott, founder and chairman of Research Affiliates.

Although value stocks trumped their growth-oriented peers during last year’s rout, growth stocks are back in the lead. The Russell 3000 Growth Index has jumped 13% in 2023, while the Russell 3000 Value Index has edged up 0.1%.

When inflation has run between 4% to 8% a year, value stocks have outperformed their growth peers by 6 to 8 percentage points annually, Mr. Arnott said. Consumer prices rose 6% in February from the year before, the smallest increase since September 2021.

“Inflation is wonderful for value,” he added.

3% vs. 60%

Torsten Sløk Apollo

Date Posted:: April 8, 2026
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Torsten Sløk notes the direct lending market is ~$2T or 3% of household and non-financial debt outstanding. To provide context, he shows that in 2006, on the eve of the crisis, mortgages accounted for ~60% of such debt.

The direct lending market is roughly $2 trillion, or about 3% of total debt outstanding for US households and businesses. By comparison, mortgages accounted for about 60% of total household and corporate debt at the peak of the housing bubble in 2006.

Takeaways by Macro Roundup^® AI

Direct lending represents a small but growing alternative to traditional bank financing for businesses and households.
The mortgage market’s dominance has shifted dramatically since the 2006 housing peak, reducing systemic risk concentration.
Non-bank lenders now capture meaningful market share in credit provision across the economy.

Top 10% of Earners Drive a Growing Share of US Consumer Spending

Jonnelle Marte Bloomberg

Date Posted:: September 17, 2025
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Mark Zandi finds Americans in the top 10% of the income distribution accounted for 49.2% of consumer spending in Q2, the highest level since 1989.

Consumers in the top 10% of the income distribution accounted for 49.2% of total spending in the second quarter, up from 48.5% in the first quarter, reaching the highest level in data going back to 1989, according to an analysis of Federal Reserve data by Mark Zandi, chief economist for Moody’s Analytics. In contrast, the bottom 80% of the income distribution, or consumers making less than roughly $175,000 a year, have seen their spending merely keep pace with inflation since the pandemic.

Litigation Nation, Engineering Empire

Jonathon Sine Cogitations

Date Posted:: September 2, 2025
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Jonathon Sine argues China “is moving beyond its breakneck industrial prime, facing similar dilemmas to those America confronted in the 1960s and 70s.” The ratio of science/engineering to humanities undergraduate majors is 2:1 in both the PRC and US.

Dan Wang’s “big idea” [is] “China is an engineering state, building big at breakneck speed, in contrast to the United States’ lawyerly society, blocking everything it can, good and bad.” I re-group US college majors according to Chinese disciplines to allow for rough comparison. Surprisingly, the ratio of science/engineering to humanities/social sciences is 2:1, the same as in China (if one groups management with science/engineering, as I also do for China). As with China today, America’s breakneck building phase was decidedly winding down by the 1960s. Urbanization went from 40% in 1900 to 70% by 1960, and grew much more incrementally over the next 60 years to 85% by 2020. The country simply did not need to continue building dams, expressways, and energy production facilities at breakneck pace. It became much more a matter of maintaining and upgrading (which has not gone well, at least according to the American Society of Civil Engineers’ report card). The American [building/investment slowdown that started after the 1970s] may be more about structural economic shifts than lawyers.

How America’s AI Boom Is Squeezing The Rest Of The Economy

Economist Staff The Economist

Date Posted:: August 19, 2025
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Is Important:: Important

As AI-related investment has risen since 2023, residential and nonresidential investment have declined or flatlined. This may suggest that a relatively rate-insensitive AI buildout is crowding out more interest-sensitive forms of investment.

Something like a sixth of the 2% rise in American real GDP over the past year has come from investments in computer and communications equipment, including chips, and data centres. Add in the grid upgrades to power AI models, plus the intellectual-property value of the software itself, and one estimate puts the boom’s contribution to real GDP growth at 40%. The trouble is that the very sector powering so much of America’s economic growth is squeezing the rest of its output. Housebuilders, for instance, cannot afford to be blithe about higher borrowing costs. Data centres have also constrained the rest of the economy by keeping energy prices high. Average American electricity bills have risen by 7% so far in 2025, at least in part due to the extra strain data centres have put on the grid. Real consumption has flatlined since December. Housebuilding has slumped, as has non-AI business investment.

Is it Over?

Joseph Wang Fed Guy Blog

Date Posted:: August 18, 2025
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Following tepid reactions to the release of GTP-5, Joe Wang observes, “It is looking more like companies are spending hundreds of billions on rapidly depreciating GPUs that produce a commoditized product that most clients only modestly benefit from.”

GPT-5 users widely expressed disappointment in the capabilities of the new release, which seemed in some ways a step back. This sentiment is reflected in benchmarks that show a modest improvement in capabilities since the significant improvement in version 4 released two years ago. In addition, the benchmarks suggest a broader convergence in the capabilities of AI models. Commentary suggests this could be due to inherent limitations in the LLM technology and exhaustion of new training data. AI is fascinating technology, but it may not justify the enormous sums spent in its pursuit. It is looking more like companies are spending hundreds of billions on rapidly depreciating GPUs that produce a commoditized product that most clients only modestly benefit from. The entire macro landscape would look very different without the support of the AI boom.

US Households and Firms Are in Great Shape

Torsten Sløk Apollo

Date Posted:: March 31, 2025
Is Database:: Database

Torsten Sløk notes that US household and banking sector debt has fallen to its lowest level in decades as a % of GDP, while corporate leverage has moved sideways. “The bottom line is that the private sector in the US is in incredibly good shape.”

Household sector leverage and banking sector leverage have declined significantly since 2008. Over the same period, federal government leverage has increased significantly, and corporate leverage has moved sideways. The bottom line is that the private sector in the US is in incredibly good shape.

@EricWallenstein The equity risk premium (ERP) for the S&P 500 has fallen to 1.59pp, its lowest since October 2007, below the average ERP of 3.5pp since 2008.

Torsten Sløk notes the direct lending market is ~$2T or 3% of household and non-financial debt outstanding. To provide context, he shows that in 2006, on the eve of the crisis, mortgages accounted for ~60% of such debt.

Takeaways by Macro Roundup® AI

Related Articles:

Mark Zandi finds Americans in the top 10% of the income distribution accounted for 49.2% of consumer spending in Q2, the highest level since 1989.

Related Articles:

Jonathon Sine argues China “is moving beyond its breakneck industrial prime, facing similar dilemmas to those America confronted in the 1960s and 70s.” The ratio of science/engineering to humanities undergraduate majors is 2:1 in both the PRC and US.

Related Articles:

As AI-related investment has risen since 2023, residential and nonresidential investment have declined or flatlined. This may suggest that a relatively rate-insensitive AI buildout is crowding out more interest-sensitive forms of investment.

Related Articles:

Following tepid reactions to the release of GTP-5, Joe Wang observes, “It is looking more like companies are spending hundreds of billions on rapidly depreciating GPUs that produce a commoditized product that most clients only modestly benefit from.”

Related Articles:

​​Torsten Sløk notes that US household and banking sector debt has fallen to its lowest level in decades as a % of GDP, while corporate leverage has moved sideways. “The bottom line is that the private sector in the US is in incredibly good shape.”

Related Articles:

Takeaways by Macro Roundup^® AI

Torsten Sløk notes that US household and banking sector debt has fallen to its lowest level in decades as a % of GDP, while corporate leverage has moved sideways. “The bottom line is that the private sector in the US is in incredibly good shape.”