Equity Risk Premium Near An Extreme

The equity risk premium recently reached levels last seen at the height of the financial crisis in 2008. The high risk premium level suggests equities are attractive at this point in the market cycle. One key is whether corporate earnings can continue to make new record highs in 2012. Earnings growth is expected albeit at a slower rate than achieved in 2011. Given the level of stock buybacks and more importantly, company dividend increases, it seems equities could do well looking forward. The buyback and dividend actions by companies provide some level of favorable insight into company earnings expectations. As is typically the case, unforeseen events can derail a favorable market environment. The known risks are numerous and will continue to result in somewhat volatile price action (sovereign debt issues, political rhetoric in the U.S., dealing with the U.S. budget deficit and debt levels, just to name a few), but our forecast suggests equity prices should end 2012 higher.

From The Blog of HORAN Capital Advisors