Data Update 2 for 2025: The Party Continued (for US Equities)

In the part 2 of data update from Professor Aswath Damodaran, he examines the continued rise of U.S. equities, which now account for 49% of global market capitalization—up from 42% in 2023. The S&P 500 delivered a 24.88% total return in 2024, following an equally impressive 2023, making it one of the top ten two-year runs in history.

However, Damodaran warns that current valuations are high. The S&P 500’s trailing PE ratio is 24.16—well above historical averages. The earnings yield is now lower than the 10-year treasury rate, raising concerns about negative equity risk premiums. Using a forward-looking model, he estimates an expected return of 8.91% and an implied equity risk premium of 4.33%.

His base valuation suggests the index may be 12% overvalued, with an 80% chance that stocks are overpriced under current assumptions. While Damodaran doesn’t offer market timing advice, he urges investors to engage with the data, consider risks like inflation and geopolitics, and run their own valuations.