Home > Insights > Research > Three Dogs That Did Not Bark: Risk Premia and Stock Market Shocks

Executive Summary

  • Thereʼs a bone of contention among investors: Are U.S. equity values about right or far too high?
  • Based on the equity risk premium, stocks are either marginally expensive or fairly valued (depending on the data window).
  • Yet standard valuation ratios – such as market capitalization-to-GDP, Tobin’s Q, CAPE and market cap-to-corporate profits – suggest stock prices are severely inflated.
  • Equity values are vulnerable to three types of risk premia: the conventional equity risk premium, the risk of monetary tightening and the prospect of decreasing inequality.

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The Author

Jamil Baz

Head of Client Solutions and Analytics

Josh Davis

Global Head of Risk Management

Normane Gillmann

Quantitative Research Analyst

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PIMCO Australia Pty Ltd
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PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs.