Equity risk premium
ERP
What it is
Gap between S&P 500 earnings yield and the 10-year US Treasury yield. Represents the premium the equity market offers over "risk-free". An ERP of 3% means equities pay 3 points more than Treasuries.
How to read it
A high ERP (>5%) signals equities are cheap vs bonds — often at bear market exits. Negative or very low ERP (<2%) signals the opposite — bonds become competitive, equities lose relative appeal.
Common reference points
- Very favorable to equities> 5%
- Historic norm3 – 5%
- Compressed1 – 3%
- Negative — bonds win< 1%
Orders of magnitude, not a rule: the same number does not mean the same thing from one sector to the next.
What it does not tell you
ERP is in fact a convention — there are multiple ways to compute it (forward EY vs trailing EY, nominal 10Y vs real, etc.). And it can stay low for a long time without triggering a correction.
Other measures — Macro — valuation
Educational content. Polaris is not a registered investment adviser and makes no recommendation.