WATCH: Valuation Guru Prof Damodaran on Interest Rates and SPX Value
NYU Professor Aswath Damodaran gives us a 15 minute lecture on the relationship between interest rates and stock market value. He feels this is necessary because recently, several market strategists and equity research analysts have presented flawed narratives on equity value.
First, he examines to what extent the Fed has influence on the longer term bonds. He then reminds us that the forces that drive up interest rates and thus increase the discount rate, also have an effect on other inputs of valuation - the equity risk premium, earnings growth, and cash flows.
Finally, taking into account the aforementioned constraints, he draws up three valuation scenario's for the S&P 500: More of the Same, The Return of Inflation, and The Growth Engine Revs Up.