Lilia Peytavin

Measuring the Equity Risk Premium

Lilia Peytavin, Liz

Following a rapid rebound in global equities, analysts have revised fair value models to account for structurally high Equity Risk Premiums driven by record-low bond yields, resulting in current estimates of 6.5% for Europe and 4.5% for the US. These adjustments suggest that equities will outperform bonds over the next 12 months, with a forecasted decline in the premium potentially unlocking a 10% upside for European indices by 2021. However, this constructive outlook remains contingent on successful economic recovery and vaccine deployment, as delays or rising bankruptcies could undermine the optimistic growth assumptions required to validate the projected 70% ERP reduction.