Dwindling Equity Risk Premium Can Lead to a Severe Stock Pullback

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Dwindling Equity Risk Premium Can Lead to a Severe Stock Pullback
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Market Overview Analysis by The Tokenist (Timothy Fries) covering: S&P 500, Dow Jones Industrial Average, SPDR® Dow Jones Industrial Average ETF Trust, iShares Core S&P 500 ETF. Read The Tokenist (Timothy Fries)'s latest article on Investing.com

Soaring bond yields have pushed the equity risk premium to the lowest level since 2002, signaling a potential equities sell-off.

The Fed and other global central banks have been hiking interest rates almost non-stop since March 2022 to bring down record-high inflation. Despite this particularly hawkish campaign, inflation stood at 3.7% in August, notably higher than the central bank’s 2% target. These warnings exacerbated the bond market downturn, propelling yields to multi-year highs. Moreover, this upswing also battered the equity-risk premium – a measure of the reward for holding stocks over government bonds – pushing it to a 20-year low., which reflects expected profits for the next year, was only 0.

Remarkably, the bulk of S&P 500’s gains this year were fueled by so-called “Magnificent Seven” companies thriving on the ongoing artificial intelligence boom. These stocks collectively soared over 50% year-to-date, while the remaining 493 stocks within the benchmark index gained about 5%.The current macroeconomic backdrop should ultimately lead to a favorable outcome for precious metals, but, in the interim, it is putting pressure on that asset class. Most notably,...

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