The so-called equity risk premium—or the gap between the S&P 500's earnings yield and that of 10-year Treasurys—

Hmm. First, that isn't what the equity risk premium is.

Second, that isn't how you'd calculate it.

But more importantly:
Anyone thinking that it's meaningful to compare those two quantities directly should first read "Fight the Fed Model", a lovely paper rousoundingly debunking the myth, from over 20 years ago. In short, prevailing nominal bond interest rates at the time of purchase of equities have no bearing at all on your return from the equities, neither theoretically nor empirically. What *does* matter is the valuation level of the equities at the time of purchase, regardless of whether interest rates were high or low at the time. Well, yeah.

Jim

Berkshire Hathaway FAQ

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