JPMorgan warned in a note this week that the equity risk premium has shrunk to its lowest level since 2002, with implications for how equities behave from here. Strategist Nikolaos Panigirtzoglou said the S&P 500 equity risk premium has fallen to about 2.1% on the bank's estimates, roughly 100 basis points below historical averages, driven by this year's equity rally and a steep rise in real bond yields, taking it below the previous cycle low of 2.4% seen in 2007. He drew three implications: stocks are likely to become more sensitive to moves in bond yields, echoing the 1974-to-1998 period of low risk premia; the shrinking premium strengthens the case for bonds over equities in long-term asset allocation, with JPMorgan's metrics said to show non-bank investors, as well as G4 pension funds and insurers, the most overweight equities relative to bonds since 2002; and the shift is expected to reinforce the positive bond-equity correlation that emerged in 2022 after the inflation shock. That, Panigirtzoglou said, poses a sustained headwind for the risk parity trade, which relies on bonds to hedge equity risk, and could boost demand for direct equity hedges such as puts.
JPMorgan Chase & CoJPMorgan's own strategist note warns the equity risk premium is at its lowest since 2002, a valuation/asset-allocation call that is neither clearly positive nor negative for the bank itself.
