Deutsche: 90% of Stock Rally Due To Collapse In Equity Risk Premium

The equity risk premium, the excess return that investing in the stock market provides over a risk-free rate such as US Treasury bonds, is an important part of financial theory. The majority of economists and analysts agree that the concept of an equity risk premium is valid as over the long-term the market will compensate investors for taking on the greater risk of investing in stocks.

Calculating the equity risk premium requires two key data inputs, the estimated expected return on stocks and the estimated expected return on safe bonds. Unfortunately, in today’s world of ultra-low interest rates and easy money policies that are pushing money into equities, inflating valuations and pushing down long-term expected returns, the equity risk premium has...