December 15, 2025: U.S. Market Negative Equity Risk Premium Analysis

On December 15, 2025, Investorplace published a report warning of a negative equity risk premium (ERP) in the U.S. stock market [1]. The ERP, which measures the additional return investors require for holding stocks over risk-free U.S. Treasury bonds, turned negative when the S&P 500 earnings yield (~3.99%, derived from a TTM PE ratio of 25.06 [2]) fell below the 10-year Treasury yield (4.17% [3]). This unusual condition signals that stocks are offering lower expected returns than bonds despite higher inherent risk [0].

The market reacted immediately with declines across major indices: the S&P 500 dropped 0.64%, the NASDAQ Composite (weighted toward growth stocks) fell 1.17%, and the Dow Jones Industrial Average declined 0.37% [0]. Sector performance reflected investor rotation from higher-risk to lower-risk assets: defensive sectors like Healthcare (+0.73%) and Real Estate (+0.52%) outperformed, while growth and cyclical sectors such as Technology (-1.40%) and Financial Services (-1.18%) underperformed [0].

1. ERP Methodology Sensitivity
   : The reported negative ERP is based on trailing 12-month (TTM) earnings yield [2]. Using forward earnings estimates could potentially reverse this reading, highlighting the sensitivity of ERP calculations to underlying assumptions [0].

2. Sector Rotation Alignment
   : The day’s sector performance directly aligns with the implications of a negative ERP: investors sought safety in defensive sectors, avoiding growth stocks that are more vulnerable to rising bond yields and valuation concerns [0].

3. Historical Context
   : Negative ERP periods have occasionally preceded market corrections, though this is not a definitive signal, as forward earnings growth could rebalance the ERP over time [0].

• Market Correction
  : A negative ERP may indicate overvalued stocks, increasing the risk of a broader market correction [0].
• Growth Sector Volatility
  : Technology and other growth sectors could face continued pressure as investors prioritize assets with yields competitive with Treasury bonds [0].
• Bond Yield Sensitivity
  : Further increases in 10-year Treasury yields could worsen the ERP deficit, amplifying market downward pressure [0].

• Defensive Sector Stability
  : Healthcare and Real Estate sectors demonstrated resilience during the day’s market decline, potentially offering relative stability amid uncertainty [0].

This analysis synthesizes the negative ERP report and its immediate market impact:

• The U.S. market’s ERP turned negative on December 15, 2025, with S&P 500 earnings yield lagging the 10-year Treasury yield [0][1][2][3].
• Major indices declined, with the NASDAQ experiencing the largest drop due to its growth stock concentration [0].
• Defensive sectors outperformed, signaling investor risk aversion [0].
• Decision-makers should monitor earnings reports, Fed policy, and Treasury yield movements to assess whether the negative ERP is temporary or a longer-term trend [0].