The Relative Valuation of U.S. Equities at Bear Market: A Perspective on the Equity Risk Premium

dc.contributor.authorIrons, Robert
dc.contributor.authorWeigand, Robert A.en_US
dc.dateAugust 2011en_US
dc.description.abstractWe investigate stock returns, earnings growth, interest rates and the relative valuation of US equities following the 22 major bear market bottoms from 1881-2011. We find that large, sustainable bull market returns are associated with market bottoms where stocks' earnings yield expands significantly (as P/E ratios compress below average). Market bottoms since 1950 have been associated with shorter bear markets, lower average market earnings yields and slower real earnings growth following the market bottom, but higher real stock returns over the next 10 years. Since 1950, equity values have grown significantly faster than earnings, resulting in compression of the market earnings yield and stock-over-bond risk premium. Stock returns have become gradually disconnected from earnings to the point that earnings yield is no longer reliably mean-reverting, and thus no longer predictive of future equity returns. Although we estimate the real equity risk premium to be only 0.5% below its post-1950 average, in the low-inflation, low-yield environment, US equities are priced to deliver below-average real returns of approximately 3.5% per year for the coming decade.en_US
dc.description.sponsorshipKaw Valley Banken_US
dc.identifier.otherSchool of Business Working Paper Series; No. 132en_US
dc.publisherWashburn University. School of Businessen_US
dc.subjectBear marketsen_US
dc.subjectUnited Statesen_US
dc.subjectFinancial risk managementen_US
dc.subjectForecasting modelsen_US
dc.subjectStock returnsen_US
dc.subjectEarning yieldsen_US
dc.subjectBond yieldsen_US
dc.titleThe Relative Valuation of U.S. Equities at Bear Market: A Perspective on the Equity Risk Premiumen_US
dc.typeWorking paperen_US
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