ICYMI: S&P 500 Could Surge Another 12%, Says Stock Market Bull
It's almost hump day.
But it was a good day for stocks, as all three major U.S. indices ended higher Tuesday.
While some on Wall Street have been growing cautious on U.S. stocks, which have surged to start 2019, there's still a technical argument to be made for further gains.
Can the S&P 500 Pump Even Higher?
"Stocks may keep going higher," wrote LPL Financial's Chief Investment Officer John Lynch, adding that "stock valuations, when compared with bond yields, are actually historically cheap." Lynch noted that the current equity risk premium (ERP) on the S&P 500 is 3% against the 10 year treasury yield, which is currently at 2.63%.
That risk premium of 3% is far above the average ERP of 0.5% for the past six decades, Lynch noted.
Before we get into what this means for stock gains, let's go over this: What is the Equity Risk Premium?
The ERP is the difference between the expected average earnings yield on a stock for the next 12 months, usually for the S&P 500 for the U.S. market, and the yield on the 10 treasury bond.
It's a measure of how much excess return an investor is getting for taking the risk of owning a stock instead of a safe treasury bond.
Case in point: Lynch wrote that, since 1960, when the ERP for the S&P 500 is above 3%, the index sees gains of 12.4% for the next 12 months on average.
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