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).
Metrics in this report
0.50%percent
US Treasury, May 5, 2022; moved up from near zero at year-start
3.00%percent
US Treasury, May 5, 2022; moved up from 1.51% on January 1, 2022
5.14%percent
S&P 500 implied premium, May 2022; up from 4.24% at January 2022; at high end of historical range
5.40%percent
US consumers, March 2022; highest level since early 1980s
2.85%percent
US 10-year TIPs-adjusted rate, May 2022; 10-year high
8.00%percent
Forward-looking estimate, May 2022; up from 5.75% at start of year; highest since May 2019
4147points
Close of trading May 5, 2022; down 13.3% from start of year