Formula & Calculation Mechanism
S&P 500 Forward Earnings Yield (1 / Forward P/E) minus 10-Year Treasury Yield
Higher ERP (>2.5%) indicates equities offer attractive compensation over bonds. Lower ERP (<1.0%) means stocks are historically expensive relative to bonds.
Market Impact on US Equities & S&P 500
Ultra-low ERP (<0.5%) pressures institutional fund managers to reallocate away from equities into high-yielding Treasury bonds.
Historical Precedents & Bull/Bear Regimes
In 2024, ERP compressed to near 0.2%, the tightest level since 2002, reflecting high equity valuations relative to 4.3% bond yields.