In a recent CNBC ‘Closing Bell’ segment, Aswath Damodaran, a renowned NYU Stern School of Business professor known as the “Dean of Valuation,” shared his thoughts on the market’s captivation with cutting-edge technologies such as quantum computing and artificial intelligence. He voiced concerns about the immediate influence these innovations might have on the market, suggesting that the buzz, fueled by big names like Jensen Huang and Mark zuckerberg, could be masking the complexities of their long-term development.
Damodaran acknowledged the potential of these technologies but cautioned that their real-world submission and market readiness are still distant. He stressed that the market’s tendency to crown certain stocks as “market leaders” with sky-high valuations may not hold water in the short term, as many of these companies are essentially bets on future products rather than established enterprises.
He described these tech companies as more akin to speculative options rather than traditional businesses, with their current market caps being relatively modest in the broader context.This scenario often leads to these firms being absorbed by larger tech giants rather than evolving into standalone, stable entities.
Shifting focus to the broader market, Damodaran noted the recent adjustments in mega-cap tech stocks, including Nvidia (NVDA). He argued that without the sustained momentum from these key players, the market might recalibrate to more grounded expectations. He remarked that after “back-to-back 20% plus years for the S&P 500, first time since the late 1990s,” a period of normalization might be overdue, with a 9% return being a reasonable outcome.
On the macroeconomic front,Damodaran suggested that much of the anticipated positive impact from policy changes—such as tax cuts or deregulation—might already be baked into market valuations. He warned that any potential gains would likely be confined to specific sectors rather than lifting the entire market, especially since the sectors poised to benefit lack the market cap to drive widespread growth.
Discussing interest rates, Damodaran explored the implications of higher rates, noting that the market could absorb them if they stem from a robust economy. However,he cautioned against the dangers of inflation-driven rate hikes,which could lead to more challenging market conditions. He expressed optimism about rate increases driven by economic strength but acknowledged the risk of inflation resurgence if the economy overheats.
In essence, damodaran’s analysis on CNBC painted a nuanced picture of market dynamics, urging caution against over-optimism in speculative areas while recognizing the resilience of the broader market under specific conditions. His insights suggest the market is at a pivotal juncture, where investor expectations may need to align more closely with economic realities and the true timelines of technological advancements.
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