There is a saying among actuaries -- risk premia must be taken as earned and never capitalized. Maybe Redington first said it. It's certainly good to make accounting systems follow such a rule. But the equity market frequently does not follow this rule. Through higher prices, it sometimes discounts the equity premium to zero (near where we are now), and even more rarely to negative.

Thinking of the equity premium as a result fear or complacency/greed is useful -- over the last 13 years it has been as high as 13% and as low as -3%/year over the next 10-year horizon vs 10 year bonds. That it has been 6.5% vs T-bills on average can be explained like this -- 1.5% term premium, 2% corporate spreads, and reward for taking business risk of 3%/year. It's not that hard to understand.