U.S. stock market risk premium index rises, market concerns about the U.S. falling into stagflation reminiscent of the 1970s.

One indicator shows that the risk premium investors demand for holding stocks instead of bonds has risen to its highest level in over two years, as the Iran war has caused oil prices to surge, leading to market concerns that the US economy may be headed towards a stagflation environment similar to the 1970s. This indicator is a variant of the stock risk premium, used to measure the additional compensation investors expect for holding stocks instead of risk-free US Treasury bonds. Aswath Damodaran, a finance professor at New York University known for his valuation research, calculated this indicator to be close to 4.8% in early April, the highest level since the end of 2023. With the rapid escalation of the conflict in the Middle East, investor risk appetite has weakened, causing the S&P 500 index to briefly drop 9%, while oil prices surged and concerns about inflation rebounded, leading the market to pay more attention to this indicator. For some, this background is starting to uncomfortably echo the 1970s. During that time, the US experienced an energy crisis, economic growth stagnation, soaring consumer prices, and poor stock market returns. Dennis DeBusschere, President and Chief Market Strategist of 22V Research LLC, stated that the current stock risk premium "aligns with the stagflation environment of the 1970s." His company uses Damodaran's indicator. He warned that if this indicator further rises to the median levels touched during the 2008 financial crisis and the 1970s - with the current level being less than 1 percentage point away - the S&P 500 index could fall another 5% to 10%.