During a recent appearance on CNBC’s ‘Closing Bell,’ Aswath Damodaran, the NYU Stern School of Business professor often referred to as the ‘Dean of Valuation’, delved into the market’s fixation on emerging technologies like quantum computing and AI. He expressed skepticism about the immediate impact of these technologies on the market, noting that the excitement around these sectors, driven by high-profile figures like Jensen Huang and Mark Zuckerberg, might be overshadowing the reality of their long-term development timelines.
Damodaran highlighted that while these technologies are promising, their practical application and commercial viability are not imminent, suggesting a cautionary tale about market overvaluation of stocks based on hype rather than substance. He emphasized that the market’s anointment of certain stocks as “kings” with hefty valuations might not be justified in the near term, as these companies often represent options on future products rather than established businesses.
He also discussed the nature of these tech companies, suggesting they are more like options than traditional businesses, with their current market cap being relatively small in the grand scheme. This leads to a scenario where the most likely outcome for these firms might be acquisition by larger tech entities, rather than becoming stable, independent entities themselves.
Turning to the broader market, particularly mega-cap tech stocks like Nvidia (NVDA), Damodaran observed the recent market correction, noting that without the continued propulsion from these major players, the market might return to more grounded expectations. He pointed out that after “back-to-back 20% plus years for the S&P 500, first time since the late 1990s,” the market might be due for a period of adjustment, suggesting that a 9% return, while not spectacular, is quite reasonable.
Regarding the broader economic environment, Damodaran suggested that much of the expected positive impact from potential policy changes like tax cuts or deregulation might already be priced into the market. He warned that any gains would likely be sector-specific rather than market-wide, especially since the sectors most likely to benefit do not have the market cap to lift the entire market.
On the topic of interest rates, Damodaran discussed the implications of rising rates, noting that the market could handle higher rates if they reflect a stronger economy. However, he cautioned against the risks posed by inflation-driven rate hikes, which could lead to tougher market conditions. He felt more optimistic about rates increasing due to economic strength but acknowledged the real risk of inflation resurgence if the economy overheats.
In summary, Damodaran’s insights on CNBC offered a nuanced view of market dynamics, cautioning against over-optimism in speculative sectors while recognizing the resilience of the broader market under certain conditions. His analysis suggests a market at a potential inflection point, where investor expectations might need recalibrating to align with economic realities and the actual timelines of technological advancements.
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