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Research

Three Dogs That Did Not Bark: Risk Premia and Stock Market Shocks

Executive Summary

  • Thereʼs a bone of contention among investors: Are U.S. equity values about right or far too high?
  • Based on the equity risk premium, stocks are either marginally expensive or fairly valued (depending on the data window).
  • Yet standard valuation ratios – such as market capitalization-to-GDP, Tobin’s Q, CAPE and market cap-to-corporate profits – suggest stock prices are severely inflated.
  • Equity values are vulnerable to three types of risk premia: the conventional equity risk premium, the risk of monetary tightening and the prospect of decreasing inequality.

For an abridged version of this article, read our blog post, "U.S. Equity Values: The Three Dogs That Have Not Barked."

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