S&P 500 Risk Premium Nears 20-Year Low as AI Rally Stretches Valuations

The U.S. stock market’s equity risk premium has fallen near a 20-year low, signaling shrinking compensation for investors taking equity risk as the AI-driven rally pushes major indexes to record highs, Barron’s columnist Jack Hough wrote. The Federal Reserve tracks the equity risk premium by subtracting the 10-year TIPS real yield from the stock market’s expected earnings yield. Current data put the S&P 500’s forward earnings yield at about 4.7% and the 10-year inflation-protected Treasury real yield near 2%, implying an equity risk premium of roughly 2.7%. The Fed said the measure has “edged up” but remains close to its lowest level in two decades. Since 1991, the median has been about 4.6%; it turned negative during the 2000 dot-com bubble. Brad Conger, chief investment officer at Hirtle & Co., which manages about $29 billion, warned that AI infrastructure spending could become overextended. He recommended trimming technology exposure, increasing bond allocations and adding European equity exposure, while not fully exiting U.S. stocks.