The equity premium is the excess return investors demand for holding stocks over the risk-free rate, compensating for equity's higher volatility and correlation with bad states of the world. Historically it has averaged roughly 4–6% annualized, far larger than standard consumption-based models predict — the "equity premium puzzle."
The premium is the wedge between expected equity returns and a risk-free benchmark (typically short Treasuries or long real yields). Ex-ante it can be proxied by the earnings yield minus the real rate; ex-post it is realized excess return. When the risk-free rate is pulled toward zero, a stable required total return implies a mechanically wider equity premium.
In the 2025–2026 regime of compressed real rates and AI-driven mega-cap concentration, debates over a "thin" forward equity premium — whether elevated multiples leave inadequate compensation for risk — sit at the centre of asset-allocation and melt-up narratives.
If equities are expected to return 8% and the risk-free rate sits at 2%, the equity premium is 6%. A forecast that the risk-free rate is pulled toward zero while required total returns hold steady would widen that premium — a Maresca-style projection of expansion from 6% to over 20% reflects a regime where collapsing real rates, not rising equity returns, do the arithmetic.
ERP ≈ E[equity return] − risk-free rate