At the start the 2023, the conventional wisdom was that 2023 would be trying year for stocks and bonds, not only because both asset classes were coming off a terrible year in 2022, but also because inflation looked untamable and the economy seemed to be headed into a recession. It should come as no surprise that markets surprised investors on almost every front: stocks surged in 2023, interest rates leveled off and the economy held its own. In this session, I take stock at the half-way point of the year to look at how stock returns varied across regions, sectors and stock classes and note that almost all of the rise in markets has come from large cap, money-making companies, with the tech giants leading the way. I also look at what the rest of the year looks likely to deliver, providing tentative (sorry, but my macro forecasting skills are lousy) views on inflation and the economy, and a measure of the intrinsic value of the S&P 500 on July 1, 2023. (No suspense: Given earnings forecasts for the index and current interest rates, stocks are close to fairly priced). 
If you have trouble downloading the files linked below, try a different browser.
Blog Post: https://aswathdamodaran.blogspot.com/2023/07/market-resilience-or-investors-in.html
Slides: https://pages.stern.nyu.edu/~adamodar/pdfiles/blog/Midyear2023.pdf
Valuation Spreadsheet for valuing the S&P 500: https://pages.stern.nyu.edu/~adamodar/pc/blog/S&P500ValueJuly2023.xlsx

You know what they say about the best laid plans of mice and men, right?

I planned to give this session about a week ago, but life got in the way and I think it's finally time for me to put this online.

little bit about what's happened in the first half of this year, not so much as a post-mortem, but in terms of using it to understand what might be coming in the second half.

We start though with an admission which you've seen me make before, but might as well make it again.

Not that I don't have respect for people who claim to be such, but I'm just not good at it.

And the first half of 2023 should show you why I think market timing is an impossible dream.

Let's face it, every investor does some degree of market timing and very few of us seem to succeed at it consistently.

That said though, 2023 has been a particularly surprising year for people who try to time markets because markets seem to deliver new messages this year.

To understand what 2023 has brought us, I think we need to go back to the start of

I mean, we'd come off 1 of the worst years in market history, stock markets, bond markets, pretty much across asset markets.

And economists were telling us inflation might kind of spiral out of control into hyperinflation, that a recession was definitely on the way.

So I think the best place to start this discussion is to go back to the start of 2023 and take a look at where we were.

Coming into 2023, we'd come off a terrible year for stocks.

And embedded there is actually the other message we got in 2022, which was the winners of the previous decade, young growth companies, tech companies were among the ones that faced the most punishment during

It was an even worse year for bonds because of what rates did.

At the long end of the spectrum, the 10-year rate went from about

And what happened at the same time was short-term rates climbed even more.

The term structure that all used measure of what the market is delivering, I don't have much faith in it, but people look at inverted during the course of the year, short-term rates started the year close to 0% and ended the year higher than the 10-year T-bond rate.

And in a sense that change in rates is the story of what happened to the Treasury bond market in

Remember, these are US Treasuries, the place where we go for safety.

And in 2022, they were anything but safe.

During 2022, because of the rise in long term rates, the US bond market had its worst year in history.

And what happened in the Treasury market also spilled over into the corporate bond market.

For 1 simple reason, Treasury rates rise, corporate bond rates rise.

But on top of that rise in the base rate, you also got an increase in default spreads.

More at the lower end of the rating spectrum, double B, single B, triple C, then at the higher end.

Risk capital, which had become fairly reckless in the previous decade and plentiful, went to

the sidelines and stayed on the sidelines.

The riskiest asset class in this case, low rated bonds versus high rated bonds, suffered more.

And you can see that in the rising to fall spreads.

Now, if you add the rising to fall spreads on top of higher rates, the corporate bond market also had its worst year in history in 2022.

All in all, coming into 2023, We were telling a pretty negative story about what was happening across asset classes and what was coming for the economy.

And that pessimism spilled over into what the market strategists who make these predictions of the market, I don't know whether they actually believe their numbers at the start of 2023.

They were pretty downbeat about what the year would deliver.

So the consensus view was this is not going to be a good year for stocks and at best you might make a few percent but you'd be lucky to hold on.

surprise of 2023, it's that inflation which looked out of control at the start of 2023 came down pretty quickly.

Now some of this is cosmetic because you're comparing to numbers that made the inflation rate because inflation rate is the percentage change of the previous year.

So the first half of this year the advantage of comparing to really bad numbers in the previous year.

But notwithstanding that clearly rates have come down by more than people expected it to.

In this graph, I've looked at both the actual inflation number in the form of a CPI, as well as 2 measures of expectations.

1 is the numbers coming out of surveys where you're seeing a little dip, but Not that much of a change.

But also you're seeing the leveling off of the expected inflation of the US Treasury market.

If you take the 10-year Treasury bond rate and compare it to the TIPS rate, you're getting a measure of expected inflation.

That number at the end of June is down to about 2.2%.

So people's expectations are coming down, actual inflation is coming down.

This could all be temporary but for the moment at least the inflation story is starting to look better.

As for that recession any day, well it doesn't seem to have shown up yet.

In fact, if you look at measures of economic activity, they're holding up.

The unemployment numbers obviously are the strongest economic numbers here, both in terms of the claims and the unemployment rate, you're saying what recession?

It is true that if you look at the percentage change in housing price and economic activity, you're seeing a come down from the really high levels you saw in 2020 or 2021 as the economy came out of COVID.

But these are not numbers that suggest a recession.

They seem to be more consistent with either a flat or a very mild, a flat economy or a very mild recession.

Overall, the inflation news has been good.

The economy seems to be holding up better than expected.

They've not come down, but they've leveled off.

The end of June and going into July is about

close to where it was at the start of the year.

Short-term rates have gone up a little bit and of course people are quick to blame the Fed for this and we'll come back and talk about that for a moment.

So short-term rates have become a little higher, the yield curve was upward sloping at the start of the year has become a little more upward sloping but no massive contortion in the rate.

Something people again were worried about at the start of the year.

Now of course people look at this graph and say well the Fed did it.

I mean during the last few months while the Fed's been raising rates multiple times, the rates we're talking about the Fed funds rate, the long-term rates have been pretty much settled in where they are.

In fact, they're pretty much where they were a year ago.

Much of that rise in rates precedes the Fed even waking up from its slumber and reflects the fact that people's expectations of inflation went up.

So what would you read out of this interest rate trend line over 2023?

It looks like at least fears about future inflation have not become worse.

But we are really not expecting inflation to go back to 1 or 1.5 or 2%.

If that is what the Fed is hoping for, we are not there yet.

So The economy has leveled off, inflation seems to be coming down, interest rates are holding their own.

In this table, I've looked at the percentage change in market cap by region of the world and I've broken them down by sub-regions, all in US dollar terms.

And you can see across markets that the strongest market globally has been the US market, up

Now, remember, even with the surge in stock prices, you're still well below where we were at the start of 2022, down

But the US has been the strongest market.

But looking across the globe and you look across regions, China actually stands out as 1 of the few markets that actually saw, at least in dollar terms, a drop in market capitalization over the first 6 months of 2023.

Now if you look at markets like India and Africa, which had not that bad in 2022, Their 2023 doesn't look great, but overall they're ahead of the game.

They're actually higher than they were at the start of 2022.

So clearly an uneven path across, but you can see for the most part, stocks are up across the globe, more in some parts than others.

Globally, equities have added about $8.6 trillion, but $5.7 trillion of that has come from US equities.

So over the globe, there's been good news for the most part for equities, though some regions have been left out.

Latin America, in fact, is I think among the worst performing markets, up only 1%, which combined with the 17% drop in dollar terms leaves them 16% below where they were.

Eastern Europe and Russia, of course, you know, even though the stocks are collectively up in that part of the world, you're down significantly because of the Russia-Ukraine crisis playing out.

Now if you look at the currency effect, The US dollar has had a relatively weak 2023.

It's given up some of the gains it got in 2022, both against broad currencies as well as against emerging market currencies.

So overall equities are up across the globe.

Let me take the US equity market and take a deeper look at it.

If you take the US equity market and you look at what's happened over the course of the first 6 months of the year, again using the S&P and the Nasdaq as kind of shortcuts, The overall large cap stocks are up about 16 percent.

But Nasdaq stocks are up almost 32 percent.

That's almost a flip of what happened in 2022 when Nasdaq stocks were down a lot more than the S&P 500.

So clearly there's been a comeback on tech, comeback on riskier companies.

of course manifests in a number that I'm a little obsessed about that I return to where I compute the equity risk premium.

The price of risk in the equity market is a forward-looking number and that number would start at the year 2023 at

A more composite way of thinking about this, we add that to the risk-free rate at the start of the year stocks were priced to earn

they're now priced to earn 8.81% down about 1% but still a pretty healthy number 8.81% as the expected returns and this was on July 1st of 2023.

So stocks are up but the equity risk premiums and equity risk premiums are down but they're still at 5% not at an unhealthy level.

We'll come back and talk about what that tells us about the future for stocks.

But let me take a deeper dive into US equities, see where the winners and losers are.

And if you look across sectors, it's clear that the biggest winner has been technology up 43% still down 4.55% if you count both 2022 and 2023.

They've made back almost all of the money they lost last year.

There are sectors like energy where you still have the 6 months when energy in particular has had a particularly difficult 6 months.

So if you're an old-time value investor buying big dividend paying Euroturdies, it's not been a good first 6 months.

It's been a pretty uneven bull market from that perspective.

Which is if you had a portfolio which was heavily loaded up in technology, you're feeling pretty good about the first 6 months.

But a lot of financials and energy and utilities in your portfolio which tend to be value investing staples, it's not been that great a six-month period.

Looking further down broken down by industries You take a look at the worst performing and the best performing industries in percentage terms.

You look at the worst performing industries, you see a lot of energy industry groups.

Oil field services, in fact, the worst performing sector down almost 51% in the first 6 months of the year.

But other energy, coal, green, and across the board energy is down.

Financial services are heavily represented in the worst performing groups.

Think of that as the Silicon Valley Bank after effect was still coming out of it.

In terms of the best performing, it's got a combination of

So no surprise you saw that in the sector.

But it's a little misleading because a big chunk of that increase in value.

Remember there's a percentage increase in aggregate market gap.

A big percent a big portion of that increase for auto truck came from 1 company Tesla.

Again shows you how uneven the gain has been across companies.

Now take a closer look at how the gains have been distributed.

I broke US companies down into 10 deciles based on market cap into money-making and money-losing companies.

Remember the entire market if you look across all companies is about 5.6 billion.

But 5.3 out of the 5.6 billion came from the largest companies and among the largest companies money-making large companies.

I mean again I'm not saying this is a as a negative about the market but it's clearly a market where if you were in the wrong stocks you're looking at your portfolio saying what happened here I thought this was a bull market.

When you're right stocks you're saying This is amazing.

It's been a top heavy where larger companies and money making companies have benefited at the expense of money losing companies.

Remember we talked about risk capital leaving the market in 2022.

It did come back in 2023 but in a very measured way.

It didn't come back into all tech, it came back into big tech and money making tech more than small tech or money losing tech.

the long standing fight between value investors and growth investors, value investors have been losing for a while thought we're back again, because in 2022 value stocks are back.

Well, that didn't last very long, because you look at 2023.

The best performing stocks have been stocks in the highest price to book ratio, stocks that value investors would not hold.

So it's, it's maybe 2022, it's just a respite, we've reversed back to where we were in the decade before.

But we're back to value underperforming the market again in 2023.

So if I were to assess the equity market in the first half of 2023, it's been a winning market, but driven primarily by big tech and big money making tech.

You know, 80% of the overall increase in value comes from 7 companies, Apple, Microsoft, Nvidia, Amazon, Tesla, Meta and Alphabet.

If you had none of those stocks in your portfolio, you're clearly not just underperforming the market, your portfolio might be flat or even down for the year.

So it's been top heavy from that perspective.

It has been skewed more towards money-making than money-losing companies.

And there is an economic twist to the story, which is 1 reason I think money is coming back in the markets is the big fears about inflation and recession haven't played out yet.

There's still time left in this game, but for the moment at least there's a sense of relief that it hasn't happened yet.

So what's the rest of the year going to bring?

At the risk of being gravely wrong, in fact, let me take the back guarantee of being gravely wrong, here's what I think the rest of the year will deliver.

I think on inflation, the best news is behind us.

In other words, the good news on inflation is you're down, but the last stretch is going to be a trench warfare.

Our year to year comparisons are going to be against months where they're not this bad.

So the inflation rate might not show the same kind of spiky drop that you saw coming into June.

And we know the last stretch in inflation is always the toughest 1.

So getting for now even if we settled in at about 3% which is where I think we are right now, getting from 3 to 2 might be the might require a lot more pain than we've seen in the drops so far.

So the Fed still wants to bring the inflation rate down to less than 2%.

On the economy, I think that the good news is that the bad stuff hasn't happened yet, right, in terms of

But this may be 1 of those slow-moving recessions where you're going to see the housing leveling off play out and then the mortgage rates play out as you know.

It could be that the next 6 months in the next year you're going to see the long promised recession land.

I don't think it's going to be as bad as people thought it was going to be at the start of the year but it's not behind us yet.

And on interest rates I think if you're dreaming about the day we'll have 2% or 1.5% t-bond rates you're going to dream a long time.

I think that 2022 might not have been just an aberration that we might have returned to more normal rates and I think it's healthier to have T-bill rates and T-bond rates at levels that are not 0% and 2% and I think as you know given that inflation is not coming back to 1% or 0% any time soon, I'd expect rates to stay high with or without the Fed.

So notice how little the Fed is part of my story, but that's my predilection.

I don't particularly think the Fed runs the economy and interest rates, even though other people might believe differently.

As a final point you're saying what about equities?

I told you I'm not a market prognosticator or a market timer but I do do intrinsic valuations of equities.

I've done it every 6 months now for quite a while.

So I decided to value the S&P 500 at the start of July of 2023 using updated numbers for earnings and interest rates.

So what you see as my projected earnings for 2023, 2024 and 2025 are analyst projections, consensus estimates.

These are top-down from analysts who track the entire index.

So they're not biased upwards like individual company analysts are.

But I've used their estimates of earnings for the next 3 years.

And beyond that, I've assumed the growth rate is going to slide back down towards a risk-free rate, which I use as my nominal growth rate in the long term.

For my cash flows I started with the actual dividends and buybacks in the 12 months leading into this calculation and I've assumed over time that that payout ratio will adjust to reflect my long-term stable growth rate.

In other words, companies will pay out what they can fundamentally afford to pay out.

So it's an intrinsic valuation and take it for what it's worth.

I project my expected cash flows from buying equities based on analyst earnings.

And I discount them back at a required return.

I start with the T-bond rate and I add to it an expected equity risk premium of 5%.

That's on average what we've been able to deliver on stocks or seen deliver on stocks between 2008 and 2023 as an expected implied premium.

Now pre-2008 actually is a smaller number so I'm assuming that that premium has to be about 5% to be a reasonable expected return.

You add the 5% to the 3.83%, you get 3.83% as your discount rate.

Now remember, we're halfway through 2023.

So the 2023 cash flows get discounted back only half a year.

And every subsequent year, I'm already half a year into it.

So I take the present value of those cash flows.

Companies earnings grow at the same rate as the economy, the 3.83%.

That gives me a terminal value for the index of 5136.

to today with that half year assumption for 2023.

I come up with an intrinsic value of the index of

I know the stock of you know this is a another bubble look at how well the stocks have done corrections imminent they might all be right but on an intrinsic value basis stocks are shockingly close to being fairly valued given the run-up in prices.

Now remember I'm not saying that things can't go wrong.

I mean think of all the things that can go wrong.

Analysts could be underestimating the pain that's coming to earnings.

So those earnings numbers might be much higher than they should be.

Maybe some of those buybacks are going to disappear.

A smaller percentage of cash is going to be paid out.

Or maybe inflation is going to come back big time,

So implicitly there are uncertainties, but when have there not been uncertainties investing in equities?

So you ask me, am I comfortable investing in equities right now?

As comfortable as I ever will be with equities, which is with those caveats, uncertainties, I'm not a market timer.

I don't think this qualifies as a bubble yet.

So if you want to tell a bubble story, it can't just be based on the fact how stocks have gone up a lot, therefore there's a bubble.

Because on an intrinsic value basis, It looks pretty close to where it should be.

As a final point, I think 2023 again is a reminder that the biggest sin in investing is arrogance and that markets exist to kind of bring you back down to a teacher's humility.

So for those people who thought they knew what 2023 was going to deliver because they'd done their homework, they looked at the data.

is a reminder that you might have the best tools, the best data, but the market has a mind of its own.

So if you are a winner in the first half of 2023, congratulations, but don't let it go to your head.

If you're a loser in the first half of 2023, don't overreact.

Don't chase the winners of the first 6 months, buying NVIDIA now might not be a great idea.

See all Aswath Damodaran transcripts on Youtube

Investor Resilience or In Denial: A Look Back at the First Half of 2023