Global Equity Risk Premia

US stocks have underperformed all major markets except Japan year-to-date, the most significant such event in many years. So the great long-standing disparity in global equity risk premia has partially resolved. The US ERP has widened. Almost all others have narrowed. But based on each country's own historic norms, the US ERP remains the most anomalously wide. 

For the US equity premium, we have added a new historical marker at 0.12% on July 2, 2024. That's the lowest since May 2002, and we associate it with the peak of the Biden senility crisis -- a moment in which it was clear that he was incapable of running for president, but hadn't stood down from the ticket yet. Yes, it is tempting to associate this with the peak of expectations that Trump would win the election. Meanwhile, the US ERP has corrected upward significantly, especially late last week. Yes, it is tempting to associate this with the consensus now, with Biden off the ticket, that Trump will lose. Or it could be something else entirely, including a renaissance of recession fears. But the US remains the most over-valued equity market in the world in ERP terms, with overvaluation concentrated in large-cap growth. But the correction in the Magnificent Seven has raised the ERP for the other 493 stocks in the S&P 500 almost back up to the pre-GFC mean, not a particularly unusual level. 

The US equity risk premium is the lowest since 2003. You still have to go to the emerging markets to earn any premium, but even that is getting harder. Everyone wanted the markets to broaden out, and they have: risk premia are shrinking everywhere.

The US equity risk premium is by far the least attractive in the world -- at least judging by the S&P 500. Midcap is in the middle of pack, and smallcap is among the world's best (without going into countries with a lot of regime risk, such as China and Turkey).  And with this edition, we add detailed coverage for Australia and the Netherlands (at the request of clients -- we live to serve).