aswathdamodaran.blogspot.com · 2022-01-19 · 1597d

Musings on Markets: Data Update 2 for 2022 — US Stock Valuation and Equity Risk Premium Analysis

This article analyzes US stock market performance in 2021, computes implied equity risk premiums, and provides a forward-looking valuation of the S&P 500 as of January 2022. The author concludes that while stocks appear fairly valued at current implied equity risk premiums of 4.24%, expected returns have fallen to near 60-year lows, warranting reassessment of retirement savings assumptions and pension fund strategies.

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Metrics in this report

Current Payout Ratio

77.36%percent

S&P 500 dividends and buybacks as percent of earnings, last 12 months

Estimated S&P 500 2021 Earnings

206.38dollars

Analyst consensus estimate for 2021

Expected Equity Return

5.75%percent

implied

S&P 500 at January 1, 2022 pricing

Implied Equity Risk Premium

4.24%percent

current

S&P 500 as of January 1, 2022

Long-term Implied Equity Risk Premium

4.21%percent

average

S&P 500, 1960-2021 historical period

Post-Crisis Implied Equity Risk Premium

4-5%percent

average

S&P 500 since 2008

Projected Risk-Free Rate

2.5%percent

target

Projected 10-year Treasury rate in 5 years (stable growth assumption)

Risk-Free Rate

1.51%percent

current

10-year US Treasury bond rate on January 1, 2022

S&P 500 Return on Equity

16.10%percent

average

S&P 500 companies over the last decade

Sustainable Payout Ratio

84.47%percent

S&P 500 stable growth payout ratio (based on 16.10% ROE and 2.5% growth)

Trailing 12-Month S&P 500 Earnings

190.34dollars

October 2020 - September 2021