U.S. Stocks Are Overvalued, But Not In A Bubble | Professor Aswath Damodaran on Equity Valuations, AI Data Center Boom, and “Big Market Delusions”

**Jack Farley** (0:00)
Later on, you'll hear more about the Fundrise Income Fund and why sophisticated investors are turning to higher-yielding assets like private credit. But for now, let's get into today's interview. Very happy today to be joined by Professor Aswath Damodaran, finance professor at the New York University Stern School of Business. Professor, it is wonderful to be speaking to you here today. I want to ask you about the valuation. How are you assessing the valuation, whether it's fair, under or overvalued, of US money?

**Aswath Damodaran** (0:29)
What do you mean by the valuation? The valuation of what?

**Jack Farley** (0:33)
The S&P 500

**Aswath Damodaran** (0:34)
It's a richly priced market, which is building in expectations that the pathway is going to be a benign one in terms of the economy and how companies react to it. So it's no different than it was at the start of last year. What I said at the start of last year is, if to the extent that the market is right, you're going to be able to see the numbers delivered, the challenges, there are lots of things on the horizon that could potentially trip up the market. Political, economic, war, and those things don't seem to be priced in. And so far, the market's been right. It kind of blew off the tariffs after an initial shock. And in hindsight, it turns out that the economy didn't collapse, inflation didn't come back. So so far at least, the market has been right in its benign stance, but it's pricing in more benign circumstances.

**Jack Farley** (1:23)
Is there a big market delusion in NAI?

**Aswath Damodaran** (1:27)
There always is. It's a gibbet, at any time you have a big disruption. Because think of what drives a big market delusion. It's human nature. You see a big market, you're an ambitious, smart, young person, or even older person. What do you think? I want to be part of that big market. That's the entrepreneurial mindset. So you start a business. You go raise capital. Who do you raise it from? Venture capitalists. And this is selection bias. They listen to your story, the venture capitalists like your story, put money in. So you've created a pod of overconfident people looking at a big market, thinking they can conquer the market. If this pod values itself, overconfidence is going to show up as overestimated revenues and growth and cash flows.
So it's almost a feature of big change, is you will get the big market delusion. Too many businesses started going after a big market. Individually, some of those companies are going to become great companies or winners, but collectively, these companies are going to be priced too high. So it happened with the PC business in the 80s, with the Internet in the 90s, with social media in the last decade, and now it's happening with AI. And what will it mean? There will be a correction along the way. Does this mean that if you sell short on AI stocks, you're going to come out ahead? Not necessarily, because a few of them are going to be the big winners. But collectively, there's going to be a cleaning up phase. And that's coming. And I think it's healthy when it comes, because it is how we change as human beings. We overreach and then we correct. So there is a big market delusion. There will be a correction as a consequence. But I think that's part of being in a market. That's how you let markets create change.

**Jack Farley** (3:07)
There's almost always a big market delusion in every big market.

**Aswath Damodaran** (3:11)
Because human beings are overoptimistic. They're the ones who go after it. So it's human nature to overreach. Peg, what are the expressions I use in my class when people complain about bubbles and overconfident entrepreneurs, is asking the question, would you want to live in a world run by actuaries? I'll tell you what that world would look like. We'd still be in caves. Because actuaries base everything on expected values, probabilities, and they're saying this fire thing, it could get out of control. So let's make sure we have all the numbers we need before we leave the cave. But thank God we weren't run by actuaries.
For change to happen in economies, you need people to overreach. The consequence of that is you're going to have market bubbles and market corrections. They're a feature, not a bug. You want to have a market with no bubbles? Fine. But that market is going to create no innovation. There's going to be no big change that happens. Because you need chaos almost as a feature of markets for this kind of change to happen.