What Is the Equity Risk Premium? Shares vs Bonds Since 1871

Since 1871, US shares have returned 7.1% a year after inflation, with dividends reinvested. Ten-year US government bonds returned 2.4% a year. So shares paid about 4.7 percentage points a year more, as a reward for their bigger swings.

That extra return is called the equity risk premium. This guide measures it two ways: what shares have earned over bonds in the past, then what today's prices imply. In September 2026, one forward-looking measure fell below zero for the first time since its data begins in 2003.

Shares can fall a long way. A government bond pays a set rate of interest and is repaid in full. So a buyer of shares would want a higher return than a buyer of bonds.

The equity risk premium is that extra return:

Here the safe return is the yield on the 10-year US Treasury bond, a loan to the US government. What Is the Yield Curve? compares it with other loan lengths.

The premium is a gap between two returns, so it is given in percentage points, or points. A premium of 4% and a gap of 4 points mean the same thing.

The premium is a key input in the Capital Asset Pricing Model (CAPM), which estimates the return shareholders expect from one company. That return feeds a company's Weighted Average Cost of Capital (WACC), as in What Is WACC? Does CAPM Work? tests the model against real returns.

Robert Shiller, an economist at Yale University, publishes monthly S&P 500 data back to 1871, with dividends. It includes a 10-year Treasury bond return series built from bond yields. All figures here are after inflation.

From January 1871 to September 2026, shares returned 7.1% a year. Bonds returned 2.4% a year. The gap was 4.7 percentage points a year.

Over 155 years, the gap compounds. $1 put into shares in 1871 grew to about $43,800 in today's money. $1 put into bonds grew to about $38.

Damodaran publishes a yearly table from 1928. On his data, the S&P 500 returned 10.02% a year from 1928 to 2025, before inflation. Ten-year Treasury bonds returned 4.53%. His table shows a premium of 5.48 points a year (the difference before rounding).

Each point shows how much shares beat or trailed bonds each year over the ten years to that month, after inflation. Above zero, shares won. Below zero, bonds won.

Shares trailed bonds in 14% of ten-year spans since 1881. The worst was the ten years to March 2009, at −10.0 points a year. The best was the ten years to June 1959, at +19.6 points a year.

The ten years to September 2026 came near the top, at +14.9 points a year.

Longer spans were steadier. Shares trailed bonds in 1.8% of 20-year spans. Over 30 years, they trailed in just two spans, ending in June and July 1932.

The earnings yield is profit per share divided by the share price. It is the price-to-earnings (P/E) ratio turned upside down, as covered in What Is the P/E Ratio?

Shiller uses the Cyclically Adjusted Price-to-Earnings (CAPE) Ratio. It divides the price by the mean of the past ten years of profit, adjusted for inflation. In early October 2026, the S&P 500's CAPE was 40.7. So its earnings yield was 1 ÷ 40.7, or 2.46%.

Both parts of the CAPE are adjusted for inflation, so the earnings yield should be set against a bond yield after inflation.

Treasury Inflation-Protected Securities (TIPS) give that yield. They are US government bonds whose repayment rises with consumer prices. Their yield is a real yield, the return above inflation, as explained in What Is a Real Interest Rate?

The blue line subtracts the 10-year TIPS yield from the earnings yield. On 2 October 2026, the TIPS yield was 2.92%, which left a gap of −0.46 points.

On monthly averages, the blue line fell below zero in September 2026, for the first time since the data begins in 2003. Its high was +5.80 points in March 2009, when the CAPE had fallen to 13.3.

The orange line uses the ordinary 10-year Treasury yield, 5.28% on 2 October 2026. That gap was −2.82 points.

The ordinary yield also pays for expected inflation, while the earnings yield does not. So the orange line sits lower. It has been below zero in almost every month since October 2022.

Each month, Damodaran takes the cash S&P 500 companies paid out over the past year, as dividends and share buybacks. He grows it at forecast profit growth for five years, then at a slower long-run rate.

The implied premium is the yearly return that makes that future cash worth today's index level, minus the 10-year Treasury yield. On 1 October 2026, it was 4.20%. His model uses a 10-year Treasury yield of 5.29%, the level on 30 September. His other four methods gave 3.30% to 5.67%.

His premium is positive while the earnings-yield gap is negative. The data show two reasons.

First, his October model forecast profit growth of 14.59% a year for the next five years. Faster growth lifts the return implied by today's prices.

Second, the CAPE uses ten years of profit after inflation. That average was about $190 per share of the S&P 500, against $295 over the year to June 2026. So the CAPE's earnings yield is lower than one based on last year's profit.

The TIPS yield only starts in 2003. For a longer record, Shiller estimates the real yield as the 10-year Treasury yield minus inflation over the previous ten years. He calls the earnings yield minus that real yield the Excess CAPE Yield.

The Excess CAPE Yield was 0.56 points in October 2026, its lowest reading since March 2002.

The chart groups every month from January 1881 to September 2016 by its Excess CAPE Yield. It shows the median yearly gap between shares and bonds over the next ten years, after inflation.

When the yield started below 1 point, shares beat bonds by a median of just 0.9 points a year. They trailed bonds in 44% of those months. When it started at 7 or more, shares beat bonds by a median of 10.1 points a year.

The middle groups do not form a neat staircase: the 3 to 5 group did better than the 5 to 7 group.

The months below 1 also come from five long episodes: 1881 to 1901, 1928 to 1931, 1935 to 1937, 1967 to 1970 and 1994 to 2002. Breaks of under two years count as part of one episode. Their ten-year periods overlap. So the 336 months below 1 are closer to five separate results.

Damodaran's record points the same way. His implied premium was 2.05% at the end of 1999, the lowest in his yearly record, which starts in 1961. From 2000 to 2009, the S&P 500 returned −0.95% a year before inflation, while 10-year Treasury bonds returned 6.26%.

The equity risk premium is the extra return shares pay over safe bonds. Looking back, it has been 4.7 points a year since 1871. Looking ahead, in October 2026, the earnings-yield measure was below zero, while Damodaran's estimate was 4.20%.

This explainer is part of the YX Insights Academy. Each one takes a single idea and checks it against real data.

The same approach runs through everything else we publish:

Good places to start on the website:

Aswath Damodaran of NYU Stern put the implied equity risk premium at 4.20% on 1 October 2026. A simpler measure, the S&P 500's earnings yield minus the 10-year inflation-protected Treasury yield, was −0.46 points on 2 October 2026. It fell below zero in September 2026, for the first time since the data begins in 2003. The answer depends on the method.

Subtract a safe return from the return on shares. Looking back, take the stock market's yearly return over a long period and subtract the 10-year Treasury bond's return. Looking ahead, subtract a bond yield from the market's earnings yield. Another way is to solve for the return implied by today's prices, as Aswath Damodaran does each month.

Since 1871, US shares have beaten 10-year Treasury bonds by 4.7 percentage points a year after inflation, on Robert Shiller's data. On Aswath Damodaran's yearly data from 1928 to 2025, the gap was 5.48 points a year before inflation. Over single ten-year spans, it ranged from −10.0 to +19.6 points a year.

Yes. Looking back, US shares returned less than 10-year Treasury bonds in 14% of ten-year spans since 1881. The latest such run ended in July 2012. Looking ahead, the S&P 500's earnings yield fell below the 10-year inflation-protected Treasury yield in September 2026, so that measure turned negative.

In the Capital Asset Pricing Model (CAPM), the market risk premium is the expected return on the whole market minus the risk-free rate. When the market is the stock market, it is the equity risk premium. How to Estimate the Cost of Equity shows it at work for Microsoft.

DISCLAIMER: This article is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.