Pandemic, tariffs, wars — today’s markets have taken hits most of us can barely keep track of, and yet we all quietly assume every dip is just a temporary wobble. But Aswath Damodaran, professor of finance at New York University’s Stern School of Business, says investors are underestimating the dramatic changes the world is going through.
Damodaran, often known as the “dean of valuation,” said on “The Prof G Pod” podcast last month that the biggest risk in today’s financial markets comes from investors assuming we’ll figure a way through every bump, just like we always have. But he warns they aren’t pricing in the real risk: the fundamental changes shaking the modern economic order.
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“The real issue that you face is, I think, the potential for catastrophic changes is much greater now than perhaps at any time in the last 70 years,” Damodaran said. “After the second world war, we put together an economic order centered around the United States and the U.S. dollar and that’s coming apart. There’s nothing to replace it.”
Damodaran thinks markets may be underestimating the scale of change in the global economy. He said investors are quietly acting as if stock valuations are justified and past patterns of resilience will carry them through any downturns without taking into account potential “pitfalls.”
“You do bring in catastrophic risk, then the market becomes worrisome across the board,” Damodaran said on the podcast. “Whether it’s MAG 7, not MAG7, global equities, U.S. equities, collectively there seems to be too much of an acceptance that we’ll figure a way through this without serious pain.”
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Damodaran says the impact of the shakeup in the global economic order will extend beyond the U.S. to Europe and other markets. While some companies will gain during this major change, an overall market correction in stocks is highly expected given the current valuations, he said.
“I don’t think it’s going to be as painless and as easy as markets seem to be pricing it,” Damodaran said on the podcast. “That struggle’s got to be priced in more and whether that means a correction of 10%, 20%, 25%, we can debate because I think that that correction has to occur somewhere along the way as this transition plays out.”
