Just went through this video of Professor Aswath Damodaran, and one main takeaway I got was that , given the expectations in earnings growth for US equities, the implied equity risk premium seems to be hovering around the historical average and the healthiest thing that can happen for US equities would be to grow by 8-9 percent this year to let the excess consolidate.
Despite this, he said that he has been pretty cautious lately and has hoarded more cash than he normally does for the past 13 months, and has refrained from investing back into equities.
He finally concludes that if all the bad news does fructify this year and affects the bottom line , we can expect a drawdown but cautions against calling this a bubble as numbers don’t show clear signs like the dot com bubble wherein we saw implied equity risk premiums going below 2 percent.
What are your thoughts on this guys? I also want to know what shall happen if implied equity risk premiums drops to 2 percent ? Does it mean stocks have to correct by 50 percent?