What Does The Equity Risk Premium Say About Today's Market?

The real Equity Risk Premium is more useful for assessing the long-term return environment than for timing near-term equity markets.

• Advisory Research estimates the real ERP at roughly 2.0% as of August 17, 2026, below its long-term average of approximately 3.3% but above recent lows.
• The ERP has risen despite strong equity markets because expected cash flows have improved relative to current valuations, while higher inflation expectations have limited the rise in the real risk-free rate.
• In the historical analysis, starting ERP explained only about 3% of the variation in subsequent one-year real S&P 500 returns, versus approximately 81% over a 10-year horizon; the relationship weakened at 15 years.
• In the lowest ERP quintile, the median subsequent 10-year real S&P 500 return was -1.5% annualized, while today's ERP sits in the second quintile, historically associated with positive but not cheap valuation conditions.
• The current combination of a rising ERP and strong trailing returns occurred in only about 14% of observations; those episodes were followed by median real S&P 500 returns of approximately 11.6% over one year and 12.5% annualized over three years.

Takeaway: Investors should treat the ERP as a long-term valuation indicator rather than a market-timing signal; its current level suggests a positive but not exceptionally attractive long-term return environment, while the historical event study offers no clear warning from the recent rise alongside strong equities.