Growth Assets Are Not Expensive

By extracting the equity risk premium from stock prices – i.e., the compensation required by investors to bear equity risk, once the impact of interest rates and credit spreads has been discounted – we can see that investors could accept a lower premium as prices rise.

In the case of the S&P 500, the risk premium averaged 3.5% across 2016-2020. It has soared since the end of 2018, from around 2.6% to 4.4% just before the recent crisis. Since then, this premium has moved only slightly and is still around 4%, close to January 2009 levels. This premium could therefore contract by 1% over the next 18 months without any real surprise given the extent of the economic recovery, leading the S&P 500 to reach higher levels (+20%) provided that long-term interest rates change only slightly.

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