Wild swing between pessimism & optimism in the market to continue: Aswath Damodaran

An analysis by Damodaran also showed that India was the only market that delivered positive returns during the third quarter of the year (July-September period). It remains the best performing market year to date as well.

According to valuation expert Aswath Damodaran, the US market is expected to experience a repetitive cycle reminiscent of the plot of the movie Groundhog Day from 1993. The market will continue to face challenges related to inflation and recession, resulting in fluctuations between extreme optimism and pessimism. The term Groundhog Day is often used to describe situations where a series of uneventful or unwelcome events appear to recur in the same manner.

“We started the year, talking about inflation and a possible recession, and we keep returning to that conversation repeatedly. You may want to move on, but it is unlikely that either uncertainty will be resolved in the near future,” said Damodaran, Professor of Finance at the Stern School of Business at New York University in his blog post.

“In the meantime, the market will continue swinging between wild optimism (where inflation is no longer viewed as a threat and the economy has a soft landing) and extreme pessimism (where inflation comes back with a bang and the economy falls into a recession). The truth, as is often the case, will fall somewhere in the middle, but it will not be easy to find,” he added.

India: The best-performing market

An analysis by Damodaran also showed that India was the only market that delivered positive returns during the third quarter of the year (July-September period). It remains the best-performing market year to date as well.

The analysis shows that Indian equities rose by over 5 percent in the three-month period. In comparison, The US was down 4 percent in the July - September period, the United Kingdom 5 percent, Latin America 16 percent, and China and Canada 5 percent each.

Damodaran highlighted that if one is an equity investor (particularly in the US), their portfolio standing at this point of 2023 and returns for the year will be largely determined by whether they had any money invested in the high-flying stocks (for instance, NVIDIA, Apple, Microsoft, Alphabet, Meta, Amazon and Tesla, which surged despite weakness in the US markets) as well as the sector and regional skews in investments.

S&P valuation

Damodaran said he finds S&P to be fairly valued at this point in time. “I estimate an intrinsic value of the index of 4147, about 3.4% below the actual index level of 4288, making it close to fairly valued,” he wrote on October 4. The analysis is based on the 10-year treasury bond rate at 4.58 percent and the earnings estimates from analysts for 2023, 2024 and 2025.

However, Damodaran stated that he was “not a market timer, making it very unlikely that (he) will find the market to be mis-valued by a large magnitude.”

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