DAMODARAN: Stocks Are In A Sweet Spot, But One Thing Worries Me
"Are stocks still cheap?" asked CNBC's Scott Wapner.
"I don't know whether they're cheap," he responded. "But I'm not surprised they are where they are now. In a sense, the market's in a sweet spot. When you think about the four dimensions in which the market worries, things are looking good. 1) Companies are returning record amounts of cash flow; I think if you look at the collective dividends and stock buybacks, last year's going to set a record. 2) You have robust earnings growth without economic growth or the economy overheating. 3) You have low interest rates. 4) And risk premiums seem to be coming down."
Of course, Damordaran also considers the risks.
"One of my biggest worries is that economic growth comes back," he said. "Interest rates will go up. No matter what the Fed wants to believe it can do, if economic growth comes back, interest rates will go up"
Damodaran clarified that the rise in rates would have to be pretty rapid.
"It's not whether rates go up but how quickly they go up," he said. "There is that possibility that rates could explode out of the box. Sometimes when rates start to go up, it's almost like you can't stop the momentum. If it happens gradually, we might be okay. But if it happens within a few months, we might be in trouble."