I did some quick calculations this morning based on some analyst numbers I've seen that expect SPX earnings growth this quarter to be >10%. (That estimate from Dubravko Lakos of JPMorgan). I played with a few variables, and calculated a risk premium between 6.5% - 7.5%.
Granted, I used a long range T-Bond and a short term growth rate, which aren't matched. I accounted for stock buybacks of 3.58% yield and dividend yield of somewhere around 1.9% (I did use current level but not looking at it as I write this). The buyback yield was based on data from EoY 2016 and assumed a 28% drop YoY in buybacks to match last year. So these are rough numbers but in line with recent historical data.
My question is, if you take these inputs to be accurate, what does an implied equity premium of 6.5% - 7.5% suggest to you about the current state of the market? Often times that premium surges as investments are more risky, but that usually occurs when there is a correction in the market. Bubbles usually see very deflated premiums. This bull market is 8 yrs old and yet the premium is high.
Is that level simply due to mismatched inputs of T-Bond vs short term growth or is it more indicative of some underlying factors in the market (low risk free rate, low div yield)? Or are these inputs just too mismatched? If so, what would you believe to be a good implied equity risk premium.
Interested to hear your thoughts!
Submitted April 17, 2017 at 08:42AM by hcgaron http://ift.tt/2oP3LMF
