Musings on Markets: Data Update 2 for 2023 — A Rocky Year for Equities
Damodaran analyzes the 2022 equity market decline (-18.01% for S&P 500), contextualizes it historically as the sixth worst year since 1928, and employs forward-looking valuation methods to estimate an implied equity risk premium of 5.94% and expected stock return of 9.82% for 2023. The article examines how inflation drove the market correction and how higher cost of equity impacts corporate investment decisions, with valuation scenarios ranging from 3,212 to 4,311 depending on inflation and recession outcomes.
Metrics in this report
double-digitpercent
majority
More US firms have cost of equity >10% than <10% for the first time in a decade as of January 2023
1.41percent
2022 dividend yield contributing to total returns during equity market downturn
5.94percent
S&P 500 implied equity risk premium at January 1, 2023
9.82percent
S&P 500 as of January 1, 2023 using implied discount rate methodology
4.12 to 13.08percent
US equities 1928-2022, varying by time period, treasury rate, and averaging method
-18.01percent
Full year 2022 including dividends; worst year since 2008
3800index level
target
Fair value estimate assuming analyst earnings estimates are accurate and 5% desired equity risk premium, close to current level in January 2023