The extra return investors receive for taking on risk has compressed globally. For emerging markets, this premium is now negative at -1%, meaning investors are not being paid for the additional risk they're assuming compared to safer assets like government bonds.
The relationship between risk and reward in investment portfolios has shifted. The efficient frontier—the best possible return for a given level of risk—is now lower and flatter. This structural change means that simply adding more risk to a portfolio will not boost returns as significantly as it has in the past.
While the S&P 500's price-to-earnings ratio is near dot-com bubble highs, the quality of its constituent companies has significantly improved. Current companies are more profitable and generate nearly three times more free cash flow than in 2000, providing some justification for today's rich valuations.