Heading into 2025, the question must be addressed: What is a razor-thin equity risk premium telling us?
The valuations in the S&P 500 are such that 20% average annualized earnings growth are now being embedded in the pricing of the index — that is nearly triple the historical norm over half-decade cycles based on a century of data. I know there are folks out there who believe 20% average annual profits growth is doable – even though it is a 1-in-20 event historically speaking – and who believe that the ERP is appropriate.
The problem is that because there is so much overexposure to equities on household balance sheets, everyone is going to be trying to bail out together with precious few buyers on the other side, because there aren’t exactly a whole lot of folks out there with a cash position like mine At issue, which we see time and again when the technology curve hits an inflection point, investors see the capex boom and then anticipate fat returns from this capital deployment.
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