While the turmoil caused by the "Liberation Day" tariffs has subsided since early April, US markets have returned to relative calm.

The S&P 500 has even gained 20% since its low point in early April. This is causing concern about stockmarket valuations, which have once again become very high.

Very expensive stocks

The CAPE (cyclically adjusted price-earnings) ratio, which adjusts the traditional P/E multiple for the cycle, is in the 94th percentile, according to PIMCO. In other words, US stocks have only been more expensive 6% of the time since 1950.

Not only are stocks expensive in absolute terms, but also in relative terms, i.e., compared to bonds.

PIMCO analysts note that the equity risk premium (ERP) – i.e., the difference between equity and bond yields – is now zero. Historically, this situation has occurred twice before: in 1987 and between 1996 and 2001.

Source: PIMCO

Each time, this was followed by a sharp stockmarket correction and a marked decline in long-term bond yields. When the risk premium is zero, it means that the return on risk-free assets (Treasury bills) is equivalent to that on risky assets (equities). Investors are therefore encouraged to exit equities and reposition themselves in bonds.

"The risk premium on equities in the US is exceptionally low by historical standards," PIMCO analysts wrote in their five-year outlook note published on Tuesday. "A return to the mean would typically imply a bond rally, a stockmarket correction, or both."

However, such a return never happens spontaneously. It requires a catalyst. The market rally may be primarily explained by excessive selling in April, easing trade tensions, and persistent optimism about the performance of tech giants, driven by artificial intelligence. Thus, even though economic, trade, and political risks remain, there are no signs of an imminent correction.

Are bonds really attractive?

Nevertheless, investors may be tempted to rebalance their positions. Jim Paulsen, a retired strategist, points out that the overall portfolio of US investors is currently heavily weighted towards equities. In his view, this leaves significant scope for reallocating capital to bonds.

However, bonds are also cheap because the economic environment makes them unattractive. Massive government spending in Washington – which has cost the US its triple-A rating at Moody's – and persistent inflation concerns are keeping yields high.

The term premium, which measures the compensation required by investors to hold long-term debt, is now at its highest level in over a decade, reflecting mistrust of the US fiscal trajectory.

And the situation shows little sign of improving: President Donald Trump's "Big Beautiful Bill" is expected to add $2.4 trillion to US debt over the next decade, according to the Congressional Budget Office. This will further increase upward pressure on yields.

As such, there is no indication that investors are rushing to buy bonds, despite a zero risk premium.