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Author: AdrianC ⎊🐝  😊 😞
Number: of 15062 
Subject: Re: OT: Equity Risk Premium
Date: 11/19/2024 11:43 AM
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The so-called equity risk premium—or the gap between the S&P 500's earnings yield and that of 10-year Treasurys—

Hmm. First, that isn't what the equity risk premium is.

Yes. We should tell the WSJ (I mistakenly wrote WaPo in the OP).

Second, that isn't how you'd calculate it.

Hence me posting the Damodaran paper.

In short, prevailing nominal bond interest rates at the time of purchase of equities have no bearing at all on your return from the equities, neither theoretically nor empirically. What *does* matter is the valuation level of the equities at the time of purchase, regardless of whether interest rates were high or low at the time. Well, yeah.

Don't interest rates affect the valuation? Can ERP be used as an indicator of market valuation?

Here's Buffett, maybe:

"Interest rates are to asset prices like gravity is to the apple. They power everything in the economic universe."
"If interest rates are nothing, values can be almost infinite. If interest rates are extremely high, that's a huge gravitational pull on values."
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