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.

Download PDF

For an abridged version of this article, read our blog post, “U.S. Equity Values: The Three Dogs That Have Not Barked.”

The Author

Jamil Baz

Head of Client Solutions and Analytics

Josh Davis

Global Head of Risk Management

Normane Gillmann

Quantitative Research Analyst

Related

Disclosures

London
PIMCO Europe Ltd
11 Baker Street
London W1U 3AH, England
+44 (0) 20 3640 1000

Dublin
PIMCO Europe GmbH Irish Branch,
PIMCO Global Advisors (Ireland)
Limited
3rd Floor, Harcourt Building 57B Harcourt Street
Dublin D02 F721, Ireland
+353 (0) 1592 2000

Munich
PIMCO Europe GmbH
Seidlstraße 24-24a
80335 Munich, Germany
+49 (0) 89 26209 6000

Milan
PIMCO Europe GmbH - Italy
Corso Matteotti 8
20121 Milan, Italy
+39 02 9475 5400

Zurich
PIMCO (Schweiz) GmbH
Brandschenkestrasse 41
8002 Zurich, Switzerland
Tel: + 41 44 512 49 10

Madrid
PIMCO Europe GmbH - Spain
Paseo de la Castellana, 43
28046 Madrid, Spain
Tel: +34 810 809 912

Paris
PIMCO Europe GmbH - France
50–52 Boulevard Haussmann,
75009 Paris