The defining feature of today’s equity market is the disappearance of the equity risk premium.
The S&P 500 is trading at an earnings yield of roughly 3.4%, compared with Fed Funds near 3.6% and a 10-year Treasury around 4.0%. Investors are receiving little incremental return for taking equity risk. At this level, further market gains cannot be driven by multiple expansion. Future equity returns must come primarily from earnings growth.
This compression is most visible in large-cap technology, the primary destination for capital over the past decade.
The Duration Trade Is Fully Priced
Since the global financial crisis, sustained monetary easing directed capital toward long-duration growth assets. Near-zero discount rates increased the present value of distant cash flows, driving capital into technology and software businesses with scalable models and high expected growth.
Large-cap technology absorbed a disproportionate share of incremental liquidity during this period.
That process is complete.
Today, the largest technology companies trade at earnings yields comparable to Treasury securities. Expectations for growth, margins and market dominance are already reflected in price. Additional liquidity is unlikely to generate the multiple expansion that drove equity returns over the past decade.
When financial assets are priced at low yields, credit expansion no longer raises valuations. It changes where it appears.
From Multiple Inflation to Asset Inflation
Credit expansion does not disappear when financial assets are fully priced. It moves into the nominal value of scarce assets.
When the supply of financial claims grows faster than the stock of real resources, the adjustment occurs through higher nominal prices rather than higher valuation multiples.
Gold reflects this adjustment.
With the metal trading near $4,800–$4,900 per ounce, prices are responding to persistent fiscal deficits, rising sovereign debt, ongoing balance-sheet risk and continued reserve diversification by central banks. These forces increase demand for assets that carry no counterparty risk and whose supply cannot be expanded through financial engineering.
The previous cycle expressed liquidity through higher equity multiples. The current environment expresses liquidity through higher real asset prices.
This shift changes the earnings profile of resource producers.
Operating Leverage to Nominal Prices
Gold mining is a high fixed-cost business. Once a mine is operating, costs change slowly relative to the gold price. For many producers, all-in sustaining costs range between $1,200 and $1,600 per ounce.
At $3,000 gold and $1,400 AISC, operating margin is roughly $1,600 per ounce.
At $4,800 gold, margin rises to approximately $3,400 – a roughly 60% increase in price that more than doubles operating profitability.
Production volumes change slowly in the short term. Most price increases therefore flow directly into operating income and free cash flow. Earnings growth in the sector is driven primarily by operating leverage to rising nominal prices rather than by volume growth.
The Earnings Inflection Is Visible
The operating leverage is already evident.
At AngloGold Ashanti, revenue increased 62% year-over-year, while operating margins expanded from 13% in 2023 to roughly 40% on a trailing basis as higher realized prices flowed through a largely fixed cost structure. Net debt across senior producers has fallen to multi-cycle lows, allowing incremental increases in the gold price to translate directly into operating profit, free cash flow and shareholder returns.
Valuations have improved but remain anchored to historical commodity levels. Forward P/E ratios across the sector remain in the mid- to high-single digits, indicating only a modest re-rating relative to the change in earnings power.
Where Liquidity Now Creates Growth
Since 2008, equity returns have been driven primarily by multiple expansion in long-duration growth assets. With the equity risk premium now compressed and large-cap technology trading at earnings yields comparable to Treasury securities, further gains must come from earnings rather than valuation.
If credit expansion continues, its marginal impact will be higher nominal prices for scarce resources rather than higher equity multiples.
The strongest earnings growth will therefore occur in sectors with operating leverage to rising nominal prices. In gold mining, where costs are largely fixed, higher gold prices translate directly into margin expansion, earnings and free cash flow.
Credit expansion has largely exhausted its impact on technology valuations. The marginal effect is now higher gold prices, and with fixed cost structures, those price increases are driving outsized earnings growth for producers.
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