Market Update 7th September 2026

US risk premium

In this industry there is always discussions on risk and the risk premium you assign to an asset and where you choose to take your risk. More recently a greater proportion of risk is coming from areas of the market which historically you might not have expected. In light of recent market moves I think it’s important to talk about the US and the associated risk premium which is being assigned.

One way to measure the risk premium is to use US equities forward earnings yield and the 10-year treasury yield. The forward earnings yield is currently 5.1% and the 10-year treasury is now at 4.8%, giving a difference of 0.3%, the average of this over the last 20 years or so has been 3.1%. So, this is a historically low equity risk premium, nearing the lows of the dot.com bubble. For the risk premium to come in line with the historic average the US equities forward earnings would need to be 12.6x vs what it is now which is 19.7x.

The US stock market is the largest in the world and there is no question about its stellar performance historically. However, a concern is the increase in concentration at the top of the market, the increase in correlation of stocks in the market, and the increase in passive investment into the US (and into these more concentrated and correlated businesses).

Information Technology accounts for 38% of the S&P500, with 34.7% being IT names in the top 10. Only 2 stocks in the top 10 aren’t tech names and they are JPMorgan and Berkshire Hathaway. The IT names in the US are all interconnected. There are obvious factors, such as sector sentiment which can move the companies’ share prices at the same time but there is also the circular financing element of it all. If one company misses on earnings then that might impact the ability to finance another company’s project (we’ve all seen the chart which looks like a spider web, and it does concern me).

I mentioned the passive investment into the US. This is applicable to other markets like the UK and Korea even, but the US is the largest by far. Passive investment has increased over the last decade, and it grew in popularity as a way to gain exposure markets cheaply and easily. But now with highly concentrated markets like the US and Korea the market is not well represented in client portfolios. The S&P 500 and its equal weight counterpart have become increasingly uncorrelated compared to the S&P 500 and the NASDAQ which have continued to increase in correlation over the last 3 decades.

Over the past few weeks, we have seen treasury yields rise and increasing interventions from the Treasury Secretary Scott Bessent to control this. One attempt was coordinated with Japan to prop up the Japanese yen. Japan are large buyers of US treasuries and with a weakening yen Bessent was concerned the Bank of Japan would increase their selling of US government debt.

The second intervention was the announcement of an increase in government debt buybacks by the US Treasury. The increase was from $2 billion to $4 billion per month and was designed to help liquidity in the market. It is worth noting at the peak of QE (in 2020), the buybacks were at $120 billion per month. Bond investors don’t seem to have reacted well to these interventions. The 30 year treasury yield rose to its highest in nearly 20 years despite these interventions, and the (most quoted) 10 year treasury bond was at 4.8% last week vs 4.37% at the end of June.

There are a number of reasons for yields rising. One is the Fed interest rates. Inflation in the US was up in August and now sits at around 3.3% which is well above the 2% target, while interest rates remained at 3.5-3.75% in the August minutes. The interesting part of the minutes was the split between governors. 3 voted to increase vs 9 voting to hold. Treasury bond investors are concerned that the Fed won’t increase interest rates and control inflation. There is also oil. Rising oil prices have a more immediate impact on inflation. Crude oil is at $92/barrel today following further escalations between the US and Iran.

But there are other reasons bond investors in particular are concerned and that’s due to the rising US debt and the interest it now pays to service that debt. The US debt is now $40 trillion, which makes its debt to GDP ratio 122%, while the government budget deficit is now $1.4trillion.

The US isn’t alone. Other developed countries are running large debt and deficit positions. This is another contributor to rising yields. Investors want to be compensated for the larger risk of the US fiscal position.

US corporate debt is worth noting as well. Large quantities of debt have come to the market from the tech names to fund the data centre build out. In June, collectively the big tech names had issued $350 billion of debt to fund capex for data centre build out. Considering these businesses used to be capital light and now are moving to more capital intensive business models this is worth thinking about as underlying investors.

A small note but I still think is important is that last week it was announced by the Dutch central bank that it had moved 86 tonnes of its gold reserves from the US and Canada to the UK. Before the move the Netherlands held 31.3% of its gold in New York and 19.7% in Ottawa, now the US and Canada account for 18.5% each. The UK now holds 32% of the gold reserves for the Netherlands. The reason for doing so was the gold could be more easily traded in a “crisis situation”. France did the same thing earlier in the year where it sold 129 tonnes of gold in New York and purchased the same amount in Paris. Germany mentioned moving gold out of the US but has ultimately decided not to at the moment. Central banks do move gold around. These two moves are likely a one off large move, however if more global central banks follow suit it could raise questions about sentiment towards the US.

The US isn’t alone in a lot of these points, there are highly concentrated and correlated markets globally, there are increasing government deficits, and rising government bond yields. However, the US is the largest market globally and is probably the most significant geographic location in most portfolios (whether that’s bonds or equities). So with such a low risk premium, are the risks being accurately reflected?

Emily Cave – Research Analyst

Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk) with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of Emily Cave. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments. FPC26759.