"The New York stock market is no longer as attractive as it was right after the dot-com bubble burst"... risk premium disappears

[Financial News]  
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The New York stock market has been hitting record highs day after day, but concerns about overvaluation are also growing.
Some say stocks are as unattractive as they were right after the dot-com bubble burst in 2000.
Still, there is no shortage of optimism that current share prices are far from overvalued, as corporate earnings are expected to improve sharply on the back of the AI-led Fourth Industrial Revolution (4IR).
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The Wall Street Journal (WSJ) reported on the 26th local time that warnings about the New York stock market are mounting.
According to the WSJ, one such indicator is the so-called stock risk premium, or the reward for holding stocks, which are risky assets.
This measure refers to the gap between the S&P 500 Index earnings yield and the yield on the U.S. 10-year Treasury note. Earnings yield is the percentage of earnings a company generates relative to its share price.
That stock risk premium has nearly vanished in recent weeks, and earlier last year it even turned negative, much like it did right after the dot-com bubble burst.
Because stocks are risky assets with no guarantee of principal and investors can lose part or all of their money, they must offer higher returns than U.S. Treasuries, which are regarded as the safest assets, if investors are to hold them. In other words, there must be a reward above Treasury yields — a stock risk premium — to create an incentive to own stocks.
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Recently, however, that risk premium has disappeared.
The main reason is the sharp rise in Treasury yields.
The immediate backdrop was rising inflation fears after U.S. President Donald Trump started a war with Iran on Feb. 28, the Strait of Hormuz was blocked, and global oil prices surged 60%.
The Fed's rate cuts, which had been seen as certain this year, have effectively been wiped off the table, and the market now sees a rate hike by the end of the year, or at least early next year, as almost certain.
The yield on the U.S. 10-year Treasury note, which stood at 3.96% before the war, is now nearing 4.5%.
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As Treasury yields have climbed sharply and the stock risk premium has effectively disappeared, some argue that there is no need to hold stocks.
Don Calcani, chief investment officer at Mercer Advisors, said inflation fears are growing and noted that stock market valuations have become too high.
He said the risk of a market crash has increased if the AI revolution fails to deliver the promised gains in productivity and explosive earnings growth.
Calcani said current share prices would need to be justified by enormous corporate earnings growth over the next several years, and insisted that this is not possible.
By contrast, Jeff Blazek, co-CIO of multi-asset at Neuberger Berman, urged caution against pessimism.
He said the AI boom is only beginning and expects corporate earnings growth to be steep.
Blazek argued that stocks are not cheap, but they are not absurdly expensive either.
The S&P 500 Index has also shown strong gains in the past, even amid the COVID-19 pandemic, the subsequent supply-chain disruptions that fueled sharp inflation, and the Fed's aggressive rate hikes in response.
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That optimism, however, depends on easing tensions in the Middle East and the resulting stabilization of oil prices.
Jeff Buchbinder, chief equity strategist at LPL Financial, said oil prices are the real "truth chart."
He said oil prices are a chart that shows the current direction of Middle East negotiations, adding, "If oil stays around $100 a barrel even into late summer, the market's current equation will have to be completely rewritten."
He warned that unless the two pillars of rate cuts and corporate earnings growth provide support, the current stock market will not be able to avoid a decline.
dympna@fnnews.com Song Kyung-jae Reporter