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Equity Markets Price in Risk Premium Expansion
Investors demand higher returns during uncertainty, compressing stock valuations temporarily.
When geopolitical threats loom, equity investors demand a higher "risk premium," which naturally depresses stock valuations even if earnings remain steady. This expansion in the required return can cause price-to-earnings ratios to contract by 15% across affected sectors. Investors move away from "growth" and toward "value," prioritizing companies with strong balance sheets and domestic revenue streams that are shielded from the complexities of international conflict.