aswathdamodaran.blogspot.com · 2022-05-06 · 1490d

In Search of a Steady State: Inflation, Interest Rates and Value

The article analyzes the macroeconomic impact of elevated inflation and rising interest rates on equity valuations and investment decisions as of May 2022. Damodaran explores three primary variables affecting market outlook—steady-state interest rates, equity risk premiums, and earnings estimates—and models four scenarios ranging from benign (inflation transient) to catastrophic (sustained high inflation with recession).

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Metrics in this report

1-Month Treasury Yield

0.50%percent

US Treasury, May 5, 2022; moved up from near zero at year-start

10-Year Treasury Yield

3.00%percent

US Treasury, May 5, 2022; moved up from 1.51% on January 1, 2022

Equity Risk Premium

5.14%percent

S&P 500 implied premium, May 2022; up from 4.24% at January 2022; at high end of historical range

Expected Inflation (Consumer Survey)

5.40%percent

US consumers, March 2022; highest level since early 1980s

Expected Inflation (Treasury Market Implied)

2.85%percent

US 10-year TIPs-adjusted rate, May 2022; 10-year high

Expected Return on S&P 500

8.00%percent

Forward-looking estimate, May 2022; up from 5.75% at start of year; highest since May 2019

S&P 500 Index Level

4147points

Close of trading May 5, 2022; down 13.3% from start of year