Damodaran has been remarkably consistent in his message: one does not need to stretch assumptions (in either direction) to justify the earnings and cash generation projections that support today’s price levels. Valuation, at least at the aggregate level, does not seem to rely on heroics.
The real question is not whether earnings and cash generation will grow, but who will capture that growth. Are we heading toward a winner-takes-all outcome?
Brilliant take on reframing the pricing debate around implied ERP rather than PE ratios. What stood out is how this framework sidesteps the noisy bull/bear arguemnts and gives a market-derived numebr that's actualy comparable across time. I've seen firsthand how investors fixate on PE multiples without adjusting for rate environments, basically comparing apples to oranges. The 4.23% ERP being near historical average feels like the market's saying "yeah things look pricey but we're getting compensated for it."
So you could invert the implied ERP and get the nummer of years for free cash flows that is implied at the current price level? Much like a price implied expected (PIE) free cash flow calculation as written by Mauboussin?
"Thanks, Mike! In an era of 'Geopolitical Whiplash,' the Professor’s data-driven approach is the ultimate grounding tool. I’m focusing my upcoming book on how beginners can tune out this noise and stay disciplined. Glad to have you in the loop! 📈"
Thank you for this thought-provoking post. Do historical discount factors have a place in today’s inflation scenario. How would expected returns pan out in a world without discounting? For example, when identifying value, I find using an undiscounted FCF model a better litmus test to ascertain value vs. a DCF approach.
Dr. Damodaran, thank you for your contribution to the value investing community. Your 2009 paper on evaluating financial service firms was particularly important to forming my understanding of financial institutions.
How do you reconcile with the fact that nearly all investors now performs traditional valuations - leading to increasingly narrow opportunities for quantitative value investing - and that qualitative attributes are increasingly important?
Damodaran has been remarkably consistent in his message: one does not need to stretch assumptions (in either direction) to justify the earnings and cash generation projections that support today’s price levels. Valuation, at least at the aggregate level, does not seem to rely on heroics.
The real question is not whether earnings and cash generation will grow, but who will capture that growth. Are we heading toward a winner-takes-all outcome?
Fantastic read.
Thanks, Professor Damodaran.
Brilliant take on reframing the pricing debate around implied ERP rather than PE ratios. What stood out is how this framework sidesteps the noisy bull/bear arguemnts and gives a market-derived numebr that's actualy comparable across time. I've seen firsthand how investors fixate on PE multiples without adjusting for rate environments, basically comparing apples to oranges. The 4.23% ERP being near historical average feels like the market's saying "yeah things look pricey but we're getting compensated for it."
Thank you for online teaching and your data driven approach.
Would a DCF-calculation for the combined S&P 500 Companies make sense using the market expectations?
That is what an implied ERP is… think of it as an IRR of the expected cashflows.
So you could invert the implied ERP and get the nummer of years for free cash flows that is implied at the current price level? Much like a price implied expected (PIE) free cash flow calculation as written by Mauboussin?
Maybe a big ask but would you be keen on updating this wonderful paper from 2001 with the new 25 odd years?
https://pages.stern.nyu.edu/~adamodar/pdfiles/invfables/ch3new.pdf
Great read
"Thanks, Mike! In an era of 'Geopolitical Whiplash,' the Professor’s data-driven approach is the ultimate grounding tool. I’m focusing my upcoming book on how beginners can tune out this noise and stay disciplined. Glad to have you in the loop! 📈"
Excellent and thorough 2025 recap. Thank you very much!
Thank you for this thought-provoking post. Do historical discount factors have a place in today’s inflation scenario. How would expected returns pan out in a world without discounting? For example, when identifying value, I find using an undiscounted FCF model a better litmus test to ascertain value vs. a DCF approach.
Dr. Damodaran, thank you for your contribution to the value investing community. Your 2009 paper on evaluating financial service firms was particularly important to forming my understanding of financial institutions.
How do you reconcile with the fact that nearly all investors now performs traditional valuations - leading to increasingly narrow opportunities for quantitative value investing - and that qualitative attributes are increasingly important?