What's going on?

This here stock market�s had some ups and downs this year, but according to Goldman Sachs, there are still more rootin� tootin� returns to be had. Yeehaw!

What does this mean?

Goldman�s math is based on the �equity risk premium�, or ERP: that�s the extra profit investors expect to earn from risky stocks compared to theoretically risk-free government bonds. So while stocks are currently at record highs, Goldman reckons the ERP is too � suggesting they�re still a better bet than bonds.


Here�s why: there�s an inverse relationship between bond yields and the ERP, so as bond yields have fallen to record lows, the ERP�s climbed close to all-time highs. What�s more, those low bond yields would ordinarily suggest investors are worried about weak future economic growth, which is usually a sign to sell their stocks. But since central banks � which have been buying up bonds to prop up their economies, driving yields down � are largely responsible, investors have carried on buying stocks anyway.

Why should I care?

For markets: Relationship goals.

Goldman�s worked out that, in Europe, a one percentage point decrease in bond yields theoretically adds 30% to the value of European stocks, thanks to the corresponding increase in the ERP (tweet this). That relationship�s even stronger in the US, where 90% of the ERP�s rise can be explained by falling government bond yields. And given that the Federal Reserve just hinted it�ll keep the US�s interest rates � and, by extension, bond yields � low for longer, US stocks might now be even more promising than Goldman thinks.

For you personally: That�s so next year.

Based on Goldman�s math, stocks should offer positive returns relative to bonds for the next 12 months. But in a year�s time, Goldman isn�t expecting there to be anything to choose between US stocks and bonds � though in�Europe,�stocks might still be outperforming bonds.