Investors are rushing into the stock market with fervor. However, one key metric suggests that stocks currently appear as unattractive as they were after the dot-com bubble burst.

This metric is the equity risk premium, commonly defined as the difference between the earnings yield of the S&P 500 and the yield on the 10-year U.S. Treasury note. The earnings yield represents company profits as a percentage of stock valuation. In recent weeks, this gap has nearly vanished, standing at one of its lowest levels since the turn of the millennium.

In other words, a rough gauge of expected stock returns is now only slightly higher than the yield offered by extremely safe government bonds.

The primary reason: Concerns over inflation have triggered a global bond sell-off, pushing up U.S. Treasury yields. Conflict involving Iran and disruptions in the Strait of Hormuz have driven oil prices up approximately 60% this year, dramatically altering investor expectations for interest rate cuts. Once seen as a near certainty for 2026, the prospect of rate cuts has receded. The U.S. President stated over the weekend that the U.S. and Iran were close to an agreement to reopen the Strait of Hormuz, though mediators noted progress on advancing the deal slowed on Monday.

As hopes for rate cuts fade, bond yields have climbed. The yield on the 10-year U.S. Treasury note closed at 4.57% last Friday, up from 3.96% in late February before U.S. and Israeli strikes against Iran.

While inflation worries continue to build in the bond market, stock investor sentiment remains nearly euphoric, even though equity valuations remain elevated compared to historical levels. As stock prices have soared amid a weeks-long buying frenzy on Wall Street, the S&P 500's earnings yield—based on profits expected over the next year—has declined in recent weeks.

"There is a bit of a disconnect right now between the bond market and the stock market," said Don Calcagni, Chief Investment Officer at Mercer Advisors. "It suggests inflation concerns are building, and valuations are high."

The stock market still faces several risks, including the long-standing concern that the grand promises of the AI revolution—such as leaps in productivity and surging profits—may ultimately fail to materialize.

With trading hours shortened this week due to a holiday, investors will receive key updates on the health of the U.S. economy, including a consumer confidence report, earnings from retailers Costco and Dollar Tree, and the latest data on the Federal Reserve's preferred inflation gauge.

The difference between the S&P 500's earnings yield and bond yields reflects the compensation investors receive for taking on the extra risk of owning stocks instead of bonds. The underlying logic is that, over the long term, stocks must offer a higher expected return than bonds. Otherwise, the safety and predictability of U.S. Treasuries would outweigh the risks of buying stocks, which could lose part or even all of their value.

Some investors dismiss this metric, arguing that comparing the fixed return of bonds to the potentially unlimited upside of corporate profit growth is not very meaningful. They also note that valuation metrics like the equity risk premium, considered in isolation, rarely provide a sufficient reason to sell stocks or hold cash.

However, historically, measures of the S&P 500's earnings yield relative to bond yields have provided practical guidance, especially over longer time horizons.

For example, Nobel laureate Robert Shiller has highlighted a strong link, based on over a century of data, between his preferred risk premium measure (which adjusts past earnings for inflation) and the S&P 500's future excess returns relative to bonds.

A notable exception has emerged recently: Over the past decade, the S&P 500's annualized excess returns have been significantly higher than what would have been expected based on the level of Shiller's "excess CAPE yield" a decade ago. This divergence highlights the extent to which the stock market has defied conventional rules during a period characterized by a pandemic, inflation, and sharply rising interest rates.

The equity risk premium dipped below zero early last year, when a similar combination of rising U.S. Treasury yields and soaring stock valuations pushed the metric into negative territory. The last time it remained negative for an extended period was after the dot-com bubble burst.

A key debate among stock investors now is whether the surge in profits at large U.S. companies is sufficient to justify the market's rapid climb back to record highs.

Calcagni is among the skeptics. "To support current stock prices, you would need to see this kind of earnings growth persist for several years," he said. "I just don't think that's likely."

The opposing view argues that the AI boom is just beginning, and profits will receive a greater boost as companies sell, adopt, and improve the technology, pulling along broader economic growth in the process.

"Stock valuations are not cheap, but they are not crazy expensive either," said Jeff Blazek, Co-Chief Investment Officer of Multi-Asset at Neuberger Berman. He added that his team expects the Federal Reserve to take a more dovish stance on interest rates than the broader market anticipates. "We like bonds, but we like stocks just as much."

To be sure, the market's recent surge has given investors little reason for doubt. The powerful rebound in chip stocks has reignited, with gains spreading to speculative shares in quantum computing and space companies.

However, those bullish on stock returns for 2026 warn that their outlook depends on a resolution of Middle East tensions. Jeff Buchbinder, Chief Equity Strategist at LPL Financial, said he and his colleagues have started referring to oil price charts as "the truth chart."

"Oil prices reflect how negotiations are progressing," he said. "If oil is still at $100 by late summer, then the whole thesis changes completely."

Buchbinder said he would not miss out on what currently appears to be a perfectly logical stock market rally due to high valuations. However, he is closely watching two key factors he believes are essential to maintaining the current positive momentum.

"Lower rates and higher earnings—if we don't get both, then stock market valuations start to look too high," Buchbinder said.