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Equity prices (P/E ratios) are the result of discounting expected future earnings. If we remove the impact of interest rates from equity P/E ratios, we get a measure of equity market sentiment. Equity risk sentiment (ERS) does this by subtracting a measure of bond prices from a measure of equity prices (Cyclically Adjusted Price Earnings – 1/10-year Treasury yield). The boxes below highlight interesting aspects of ERS. Download the full research paper here.
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