The equity risk premium has nearly vanished. On October 22, 2026, the S&P 500’s forward earnings yield was 5.35% (FactSet’s 18.7x forward P/E) against a 4.96% 10-year Treasury, a cushion of just 0.39 percentage points. That came the same day an AI-financing scare sent the Nasdaq to its worst session since June. Against inflation-protected TIPS, stocks still hold a 2.71-point real edge.
Key takeaways
- S&P 500 earnings yield of 5.35% beats the 10-year Treasury by only 0.39 points.
- Against the 2.64% 10-year TIPS real yield, the stock premium widens to 2.71 points.
- A 10% cut to forward earnings estimates would push the premium below zero.
What is the equity risk premium right now?
The simplest equity risk premium measure is the S&P 500’s forward earnings yield minus the 10-year Treasury yield. As of October 22–23, 2026, that is 5.35% minus 4.96%, or 0.39 percentage points. That is a thin margin for owning an asset that can fall 20% in a year.
FactSet’s October 23 Earnings Insight puts the index’s forward 12-month P/E at 18.7. Flip it and you get an earnings yield of 1 ÷ 18.7 = 5.35%. That is what each dollar of the index “earns” on next year’s expected profits.
The Federal Reserve’s H.15 release shows the 10-year Treasury at 4.96% on October 22, down from 5.13% a day earlier. Capp Notes’ closing recap had it back at 4.999% on Friday, October 23. At 5.00%, the gap is 0.35 points.
Why this week moved the number
On Thursday, October 22, the Nasdaq had its biggest one-day drop since June on worries about how heavy AI spending gets financed, the AP reported. Money ran to Treasuries, and the 10-year fell 17 basis points in one session.
Friday was quieter for tech, but the S&P 500 still slipped 0.43% to 7,629.92 and the Dow lost 626 points. Brent crude for December rose to $116.72, per Capp Notes. Bonds rallied and stocks wobbled, yet the premium barely changed.
Stocks vs bonds: how do the yields compare?
Stocks out-yield every Treasury maturity, but only barely at the long end. The S&P 500’s 5.35% earnings yield beats the 3-month bill by 1.13 points, the 10-year note by 0.39 and the 30-year bond by just 0.06. An earnings yield is not cash, so the real comparison is harsher.
| Asset | Yield (as of) | S&P 500 earnings yield minus this | Guaranteed? |
|---|---|---|---|
| S&P 500 forward earnings yield | 5.35% (Oct 23) | — | No, analyst estimate |
| 3-month Treasury bill | 4.22% (Oct 22) | +1.13 pts | Yes, held to maturity |
| 1-year Treasury | 4.41% (Oct 22) | +0.94 pts | Yes, held to maturity |
| 10-year Treasury | 4.96% (Oct 22) | +0.39 pts | Yes, held to maturity |
| 30-year Treasury | 5.29% (Oct 22) | +0.06 pts | Yes, held to maturity |
| 10-year TIPS (real yield) | 2.64% (Oct 22) | +2.71 pts | Yes, plus CPI adjustment |
| Effective fed funds rate | 3.88% (Oct 22) | +1.47 pts | Policy rate |
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One caveat runs through that table. The Treasury yields are contractual. The 5.35% is built on analysts’ forecasts for the next 12 months. A premium of 0.39 points is a thin buffer against forecast error.
Is the equity risk premium too thin to justify stocks?
Measured against nominal Treasuries, yes, the cushion is thin: 0.39 points does not pay much for equity risk. But that comparison is unfair to stocks. Corporate earnings rise with inflation and coupons do not. The cleaner yardstick is the TIPS real yield, and there stocks still lead by 2.71 points.
The nominal view: the Fed model
The “Fed model” compares the earnings yield directly with the 10-year nominal yield. On that test, the S&P 500 is close to fully priced. The P/E at which the two yields match is 1 ÷ 0.0496 = 20.2x, only 8% above today’s 18.7x.
The model has a known flaw. It compares a real asset with a nominal one. When inflation is high, it makes stocks look more expensive than they are.
The real view: stocks vs TIPS
The 10-year TIPS real yield was 2.64% on October 22, per the H.15. Subtract that from 5.35% and the real equity risk premium is 2.71 points. That is a more reasonable reward for volatility.
The gap between the two 10-year yields, 4.96% minus 2.64%, implies 2.32% average inflation over a decade. September headline CPI ran at 3.7% year over year, and core at 2.6%, per the October 14 release. The bond market is pricing inflation well below today’s headline rate. We covered that breakeven trade in detail in TIPS vs Treasuries at 5%.
What does $10,000 earn in stocks vs Treasuries?
On October 22–23 yields, $10,000 in the S&P 500 carries a claim on about $535 of next-year earnings. The same $10,000 in a 10-year Treasury pays $496 a year in coupons, and a 3-month bill pays about $422. The stock “yield” is mostly retained profits, not cash in your account.
- S&P 500: $10,000 ÷ 18.7 = $534.76 of forward earnings. Only the dividend share lands in cash; the rest is reinvested or used for buybacks.
- 10-year Treasury: $10,000 × 4.96% = $496 a year, fixed for a decade. The interest is exempt from state and local income tax.
- 10-year TIPS: $10,000 × 2.64% = $264 in real interest, plus principal that adjusts with CPI.
- 3-month bill: $10,000 × 4.22% = $422 annualized, with rollover risk if the Fed cuts.
The stock-over-bond edge is $535 − $496 = $39 a year on $10,000. That $39 is the entire reward for accepting equity drawdowns, before taxes, and it rests on an estimate.
For a fuller picture of what cash-paying stock funds offer next to Treasuries, see our breakdown of dividend ETFs vs Treasuries.
How fragile is the 5.35% earnings yield?
Quite fragile. The earnings yield rests on forward estimates that assume very strong profit growth. FactSet shows calendar-2026 earnings growth estimated at 33.1%. If forward estimates fell 10% with prices unchanged, the P/E would rise to 20.8x and the earnings yield would drop to 4.81%, below the 10-year.
Here is the skeptical read. With 24% of the index reported, FactSet counts 83% of companies beating estimates and a blended third-quarter growth rate of 29.5%. Those are strong numbers, but they are also the numbers the market is already paying for.
Thursday’s selloff was about AI financing costs, not current earnings. If investors start to doubt how long those growth rates last, the “E” in P/E shrinks. When the premium is this small, the margin for error goes first.
Valuation vs history
The S&P 500 is not expensive against its own past. FactSet’s 18.7x forward P/E sits below the 5-year average of 19.8x and the 10-year average of 19.1x. At those averages the earnings yield would be 5.05% and 5.24%.
So the thin premium is a bond story, not a stock bubble. Stocks look ordinary. Bonds simply pay 5% again.
Which investor wins with stocks, bonds or bills?
It depends on two things you can name: your time horizon and whether you need the money to be a fixed amount. Long-horizon investors are still paid 2.71 real points for equity risk. Anyone with a dated liability now gets close to stock-level yields without equity drawdowns.
| Investor profile | Most relevant yardstick | What the numbers say (Oct 22–23, 2026) |
|---|---|---|
| Saver needing cash within 1 year | 3-month / 1-year bill | 4.22%–4.41% locked in; stocks offer 0.94–1.13 pts more, unguaranteed |
| Retiree funding fixed spending | 10-year Treasury | 4.96% contractual vs a 0.39-pt stock edge |
| Investor worried about inflation | 10-year TIPS | 2.64% real; break-even inflation 2.32% |
| 20-year accumulator | Real equity premium | Stocks lead TIPS by 2.71 pts |
| Rebalancer with a 60/40 target | Nominal premium | Thin premium raises the cost of being overweight stocks |
If you hold cash at the short end, our comparison of T-bill ETFs vs money market funds covers the cheapest way to own it. The duration trade-off at the long end is in TLT vs SGOV.
What to watch next
Two scheduled Fed meetings and the rest of earnings season will set both sides of the equity risk premium. Each one can move the 10-year yield or the forward P/E by enough to erase the 0.39-point cushion or double it.
- October 27–28, 2026: FOMC meeting. The Fed raised its target range to 3.75%–4.00% on September 16. Kalshi priced a 92% chance of a hold, per Capp Notes on October 23.
- December 8–9, 2026: FOMC meeting with projections. CME FedWatch showed about 71% odds of a quarter-point hike, per the same recap. A hike would put more pressure on the premium from the bond side.
- The rest of Q3 earnings season. With 76% of S&P 500 companies still to report as of October 23, forward estimates can still change.
FAQ
What is the equity risk premium?
It is the extra return investors expect from stocks over a safe asset. A common shortcut is the S&P 500 forward earnings yield minus the 10-year Treasury yield: 0.39 points as of October 22–23, 2026.
How do you calculate the S&P 500 earnings yield?
Divide 1 by the forward P/E. FactSet’s 18.7x on October 23, 2026, gives 1 ÷ 18.7 = 5.35%.
Is a negative equity risk premium possible?
Yes. If the 10-year yield rose above the earnings yield, the simple measure would turn negative. A 10% cut to forward earnings estimates at today’s prices would be enough to do it.
Should I compare stocks with TIPS or regular Treasuries?
TIPS give the fairer comparison because corporate earnings tend to rise with inflation. Against the 2.64% 10-year TIPS real yield, stocks lead by 2.71 points.
Are stocks expensive right now?
Not against their own history. The 18.7x forward P/E is below FactSet’s 5-year (19.8x) and 10-year (19.1x) averages. The premium is thin because bond yields are high, not because stocks are stretched.
When does the Fed meet next?
The FOMC meets October 27–28, 2026, and again December 8–9, 2026, according to the Federal Reserve’s calendar.
The bottom line
On nominal terms, the equity risk premium is close to its thinnest point. A 0.39-point edge, or $39 a year on $10,000, is little pay for equity risk, and it depends entirely on analysts hitting 33% growth targets. On real terms, stocks still earn 2.71 points over TIPS, which is enough for long-horizon money.
Our read: for money with a date attached, 5% Treasuries now do the job stocks used to be needed for. For money with no date, the real premium still favors equities. Just do not mistake an estimate-based 5.35% for a coupon.
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Sources
- FactSet: S&P 500 Earnings Season Update, October 23, 2026
- Federal Reserve: H.15 Selected Interest Rates (Daily)
- Federal Reserve: FOMC statement, September 16, 2026
- Federal Reserve: FOMC meeting calendar
- AP via The Spokesman-Review: Dow, S&P 500 fall, tech steadies to end rocky week (Oct 23, 2026)
- Capp Notes: Closing Look, Friday, October 23, 2026
- investingLive: US September CPI 3.7% vs 3.6% expected
Wealth Engine researches and drafts with AI tools and checks every figure against the sources above. How we report.
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