Markets show an odd disconnect: volatility across bond, equity and currency markets has fallen to exceptionally low levels, even as macro and political risks persist. Equity valuations are approaching historical extremes while measures of market uncertainty are subdued compared with the spike seen at the height of tariff-related tensions.
Volatility rose during the earlier tariff peak but has since eased to unusually low readings. Inflation remains above the Feds 2% target and there have been public government attacks on the central bank, yet estimated equity risk premia are near 2% per Goldman Sachs—roughly one-half to one-third of historical norms (pre-2020). Corporate investment-grade credit spreads are also at very low levels, consistent with the broader drop in price-of-risk measures.
Low risk premia affect valuations directly—analysts discount expected dividends at smaller spreads and investors appear more willing to buy expected dividend streams at current risk-free rates. A fundamental explanation could be that new technologies materially improve firm profitability and reduce overall financial risk; behavioral explanations such as heightened investor enthusiasm are also possible and left to readers to assess.
— Jiřà SoustruĹľnĂk #Fed #inflation #equities #GoldmanSachs #FiatNews