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The Stock Market Is Incredibly Expensive. What History Says Comes Next for the S&P 500.

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The equity risk premium is near a 20-year low, but that isn't a negative sign. Stocks tend to rise when the premium is at this level.

The stock market isn’t just expensive, it is extremely pricey. And yet history indicates it can post impressive gains from the current level.

Whether stocks’ valuation is crazily high has a lot to do with the level of interest rates. With the index trading at 18 times earnings, an investor can expect about $5.50 in annual per-share profit for every $100 they invest in it. Yet history shows that when the equity risk premium is as low as it is now, stocks have tended to rise by double digits over the following year. When the S&P 500’s equity risk premium is between zero and 1%, its average move for the following year is just over a 12% gain, according to RBC.

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