Damodaran Slams Fed Rate Debate as 'Pointless'

Aswath Damodaran, known as Wall Street's 'Dean of Valuation,' has dismissed the debate over the Federal Reserve's interest-rate policy as 'pointless.' He claims that Fed Chair Kevin Warsh and Treasury Secretary Scott Bessent have little influence on borrowing costs without a shift in inflation expectations or economic growth.

Damodaran notes that long-term Treasury yields are primarily determined by inflation expectations, real economic growth, and bond-market supply and demand. He argues that the assumption of the Fed as an 'all-powerful force' controlling interest rates is 'simplistic and wrong-headed.'

The 10-year Treasury yield has risen from 4.18% at the beginning of this year to 4.75%, while 20- and 30-year yields have crossed 5%. Damodaran's 'intrinsic risk-free rate' stands even higher at 5.41%. Despite surging oil prices, long-term expected inflation has only risen modestly.

Damodaran challenges the notion that rising interest rates automatically reduce stock prices. He notes that corporate cash flows can change as companies raise prices, protect margins, or reduce reinvestment. The effects of higher interest rates will vary across companies, with some seeing decreases in value and others benefiting from increased cash flows.

Damodaran credits stronger profits for the market's resilience. Analysts have raised their aggregate S&P 500 earnings estimates by over 11% for both this year and next. The tech sector has gained 25.22% on an aggregate market-cap basis this year, driven largely by mega-cap companies.