Equity risk premium hits lowest level in decades as US yields test Wall Street

Bonds are becoming harder for equities to ignore

For much of the past decade, investors were used to a market in which equities offered a much more attractive return profile than government bonds. Low interest rates and abundant liquidity helped sustain the bull market on Wall Street, with capital flowing heavily into technology stocks.

That backdrop is now changing. The equity risk premium, or the extra return investors expect for holding shares instead of government bonds, has fallen to its lowest level since the start of the century. The shift matters because it suggests that the relative appeal of equities over bonds is narrowing quickly.

The main reason is the level of US yields. The 10-year US Treasury yield is holding above 4.5%, offering investors a relatively high income stream from an asset class that is usually seen as safer than equities.

Source: CMC Markets, as at 27 May 2026.

Big Tech valuations leave less room for disappointment

At the same time, valuations across US technology remain elevated. The AI-led rally, driven by companies such as Nvidia, Microsoft and Apple, has pushed the Nasdaq 100 and S&P 500 higher, but it has also made the market more sensitive to earnings disappointment.

The issue is that the earnings yield on equities, the inverse of the price/earnings (P/E) ratio, is now much closer to the return available on US Treasuries. In practice, investors may be receiving a similar prospective return from equities and from safer US government bonds.

Historically, periods like this have often been followed by weaker equity returns or sharper corrections on Wall Street, especially when valuations are already demanding.

Fund managers may rethink risk allocation

The lower equity risk premium creates a clearer dilemma for institutional investors. Fund managers need to decide whether it still makes sense to maintain high equity exposure when volatility is elevated and bonds offer a comparable yield with much lower risk.

Analysts cited in the Polish source warn that a further decline in the risk premium could encourage a gradual reallocation of capital from equities into bonds. That scenario may become more likely if technology earnings weaken or if the momentum behind the AI theme starts to fade.

The contrast with the post-financial-crisis era is sharp. A few years ago, investors had little alternative to equities because near-zero rates made cash and bonds unattractive. Today, US Treasuries again offer meaningful income, changing the balance of power across global markets.

The AI rally faces a bond-market test

This may become one of the most important tests for the current rally in AI-linked stocks. If investors begin to see bonds as more attractive than expensive technology shares, sentiment on Wall Street could cool quickly.

That does not mean the equity bull market has to end immediately. But it does mean the threshold for positive surprises is getting higher. With Treasury yields elevated and valuations stretched, US equities may need stronger earnings growth to justify the risk investors are taking.