An extensive amount of free data on risk-free rates, equity risk premiums (ERPs), corporate default spreads, corporate tax rates, country risk premiums, and more can be found on the website of Professor Aswath Damodaran (New York University Stern School of Business), who generously posts updates each year. He does a series of posts on his blog based on these new data, and his second post examines the equity market and explains his “implied” ERP. This is a forward-looking method as opposed to the “historical” ERP. “The danger of poring over this historical data is that a focus on the past can blind us to structural changes in markets that can make the future very different from the past,” he writes. “To get a measure of what equity markets are offering in terms of expected returns, we are better served with a forward-looking and dynamic measure of these returns.” He calculates the implied ERP by backing it out from the current market prices and expected future cash flows, which gives an internal rate of return for equities that is analogous to the yield to maturity on a bond. He calculates that to be 4.24% at the end of 2021. To that he adds the risk-free rate (1.51%, the 10-year T-bond rate on Jan. 1, 2022) to get the long-term annual expected return on stocks of 5.75%.

Damodaran updates his data once a year, so you need to be careful about using the data later in the year, particularly if there is a major shift or disruption in the market or the industry of your subject company.