Prof G Markets: Country Risk, Tech Valuations, & How the Markets Lost their Predictive Power — Featuring Aswath Damodaran

Release Date: August 8, 2025
Host: Vox Media Podcast Network
Guest: Professor Aswath Damodaran, Kirchner Family Chair in Finance Education and Professor of Finance at NYU's Stern School of Business

I. Introduction

In this enlightening episode of Prof G Markets, host Scott Galloway engages in a deep-dive conversation with renowned finance professor Aswath Damodaran. The discussion spans critical topics such as country risk in 2025, the evolving landscape of tech valuations, and the diminishing predictive power of modern markets.

II. Country Risk in 2025

Understanding Country Risk

Professor Damodaran begins by elucidating the concept of country risk, which assesses the potential risks investors face when investing in different countries. He outlines four primary elements:

1. Legal Rights
2. War and Violence
3. Political Structure
4. Corruption

Evolving Dynamics of Country Risk

A pivotal point in the discussion is the shift in the perception of country risk, especially concerning the United States:

• Historical Perspective: Traditionally, developed markets like the U.S. and Europe were viewed as safe havens, while emerging markets carried higher risks.

• Post-2008 Globalization: The 2008 financial crisis highlighted the interconnectedness of global markets, demonstrating that risks in one region could significantly impact others. This realization blurred the previously clear-cut distinctions between "safe" and "risky" markets.

• Recent Developments: "The US in that continuum of country risk is no longer safe as opposed to risky. It's in the spectrum of risk" ([04:34]). The downgrade of the U.S. credit rating by Moody's in May 2025 marked a significant shift, underscoring that virtually no country can now claim complete safety in investments.

Key Quotes:

• "There are no truly safe countries left anymore." — Aswath Damodaran ([06:36])

III. Market Reactions and Predictive Power

Markets as Reactive Entities

Damodaran posits that modern markets have become more reactive rather than predictive. This shift is attributed to the complex, interconnected global economy where small changes can lead to significant, unpredictable outcomes.

• Economic Slowdowns and Earnings: The real driver for market adjustments, according to Damodaran, is tangible economic data and company earnings rather than speculative narratives.

• Institutional Weakness: Damodaran highlights the erosion of institutional strength in the U.S., citing political interference and diminished federal independence as factors that have already been priced into the markets over the past decade.

Key Quotes:

• "Markets are not driven by talk, they're driven by the economy and earnings." — Aswath Damodaran ([13:40])
• "Investors will still wait to see will this play out in earnings because that link is becoming weaker." — Aswath Damodaran ([15:30])

Predictive Limitations

Damodaran draws an analogy to weather forecasting, suggesting that the global economy has reached a chaotic state where traditional predictive models fail due to the multitude of variables and their unpredictable interactions.

• Chaos Theory in Economics: Just as a small change in initial conditions can drastically alter weather forecasts, minor economic shifts can lead to significant and unforeseen market movements.

Key Quotes:

• "It's like wanting to buy a house in an expensive neighborhood, right? You don't do an intrinsic value of the house, you decide to be in that neighborhood." — Aswath Damodaran ([38:29])

IV. Tech Valuations and the AI Boom

Assessment of Big Tech Earnings

The conversation shifts to recent earnings reports from major tech giants:

• Performance Snapshot:
  • Google, Meta, Microsoft, Apple: All reported earnings beats and saw their stocks climb.
  • Amazon: While it also beat expectations, its stock did not experience the same upward momentum.

Nvidia’s Skyrocketing Valuation

A focal point of the discussion is Nvidia, which recently hit a $4.4 trillion market cap, surpassing the entire UK stock market.

• AI Architecture Leader: Damodaran refers to Nvidia as an "AI architecture," highlighting its pivotal role in the AI ecosystem.

• Valuation Concerns: He questions the sustainability of Nvidia's valuation, asserting that unless the AI products and services generate astronomic returns (e.g., $12-15 trillion in value), the current market capitalization may be unjustified.

Key Quotes:

• "Nvidia is an AI architecture. And if I frame out how much the architecture has to cost for Nvidia to be worth 4.4 trillion, I don't see economics." — Aswath Damodaran ([28:02])

V. Nvidia and AI Investments

Comparing Nvidia to Historical Tech Giants

Damodaran draws parallels between Nvidia and past tech companies like Google (Alphabet) and Amazon:

• Alphabet’s Diversification: He critiques Alphabet's diversification into various "bets" that have yet to yield substantial returns, leading to market skepticism and lower PE multiples despite its market dominance.

• Tesla Comparison: Similarities are noted between Google and Tesla regarding overambitious diversification beyond their core businesses.

Investment Thesis on AI

Damodaran distinguishes between investing in AI architecture companies like Nvidia and identifying the next AI-driven product/service giant akin to Amazon or Netflix.

• Challenges in Identifying Leaders: He emphasizes the difficulty in pinpointing which AI companies will emerge as dominant players in the product and service sectors, as opposed to those focused solely on architecture.

Key Quotes:

• "Finding the next Amazon in the AI boom will be to find the company that you think will emerge in the product and service business. That's a much, much tougher call to make." — Aswath Damodaran ([34:56])

VI. Bitcoin Treasury Companies and Crypto's Role

Transitioning to Bitcoin Treasuries

Professor Damodaran addresses the emerging trend of companies adopting bitcoin treasury strategies, exemplified by firms like MicroStrategy:

• Purpose of Corporate Cash: He outlines that companies traditionally hold cash for stability and as a buffer against economic downturns, not for high returns.

• Inappropriateness of Bitcoin for Treasuries: Damodaran argues that bitcoin's volatility makes it unsuitable for corporate treasuries aimed at risk mitigation.

Exceptions for Bitcoin Holdings

He acknowledges specific scenarios where holding bitcoin might make sense:

1. Bitcoin Savants: Companies led by individuals skilled in timing bitcoin investments.
2. Business Model Integration: Firms like PayPal and Coinbase, where bitcoin is integral to their operations.
3. Deteriorated Business Models: Companies with flawed business models turning to bitcoin to sustain shareholder interest, such as meme stocks like AMC and GameStop.

Key Quotes:

• "Bitcoin doesn't meet any of [the requirements]... it's too volatile, it swings around too much." — Aswath Damodaran ([49:33])
• "I don't want my CFO doing it for me." — Aswath Damodaran ([54:03])

VII. Bitcoin vs. Gold: A Comparative Analysis

Evaluating Bitcoin as a Collectible

Damodaran compares bitcoin to gold, questioning whether it can achieve the same enduring demand:

• Gold's Timeless Appeal: He attributes gold's sustained value to its cultural significance, physical properties, and historical role as a store of value.

• Bitcoin’s Shortfall: Contrary to gold, bitcoin lacks the intrinsic qualities and prolonged acceptance, rendering its status as a "collectible" dubious.

Emotional and Cultural Factors

While gold benefits from centuries of cultural integration and emotional resonance, bitcoin's acceptance is more recent and lacks the universal trust that gold commands.

Key Quotes:

• "What differentiates gold from bitcoin is that gold has something about it that connects to people that cuts across cultures and cuts across time." — Aswath Damodaran ([58:40])
• "Bitcoin for its existence... has not behaved like a good collectible. I mean, Covid did the first quarter of 2020 markets were down. S&P was down 33%. Gold held itself, not Bitcoin did." — Aswath Damodaran ([60:33])

VIII. Investing vs. Trading in the AI Era

Distinguishing Investment Strategies

Damodaran delineates between investing and trading within the context of the AI boom:

• Investing: Focused on assessing total addressable markets (TAM), estimating revenues, and establishing intrinsic values despite uncertainties.

• Trading: Driven by market demand and supply, momentum, and sentiment, often without a fundamental basis.

Caution Against Hype-Driven Investments

He cautions against the prevalent "big market delusion," where investors overvalue companies based on hype rather than solid financials, leading to potential market corrections.

Key Quotes:

• "Investing is about assessing tams and estimating revenues and cash flows even in the face of uncertainty." — Aswath Damodaran ([38:29])
• "I think that 95%, maybe 99% of the money in AI now is just pricing and trading." — Aswath Damodaran ([38:29])

IX. Big Market Delusion and Overreach

Historical Patterns of Market Bubbles

Damodaran draws parallels between the current AI boom and past market bubbles rooted in emerging technologies:

• Recurring Themes: From the PC era in the 1980s to the dot-com bubble in the 1990s, and online advertising in the last decade, each wave attracts overconfident entrepreneurs and venture capitalists, inflating valuations beyond intrinsic values.

• Inevitability of Corrections: He argues that such bubbles are natural progression mechanisms for innovation, leading to temporary overvaluations followed by necessary market corrections.

Optimism Despite Bubbles

Despite potential overvaluation, Damodaran maintains an optimistic view on the long-term transformative impact of technologies like AI, believing that temporary market corrections pave the way for lasting advancements.

Key Quotes:

• "I think the AI boom will have a correction, but it is going to change the way we live and work." — Aswath Damodaran ([41:35])
• "People overreach, they correct, they clean up, and then they move on and another bubble forms for the next big thing." — Aswath Damodaran ([43:55])

X. Conclusion and Final Thoughts

Addressing AI Scams

In the concluding segment, Damodaran touches upon the rise of AI-driven scams, emphasizing the importance of due diligence and awareness in an era where fraudulent schemes become increasingly sophisticated.

• Grading the Scam: He humorously grades a scam using his likeness, highlighting common red flags like inconsistent messaging and dubious content.

Looking Ahead

Damodaran remains vigilant about the evolving financial landscape, prepared to tackle emerging challenges such as AI scams while maintaining a balanced perspective on investment opportunities and market dynamics.

Key Quotes:

• "I'm not sure I'm reaching that target audience and I'm not sure that target audience can ever be protected." — Aswath Damodaran ([65:05])
• "I'm an optimist on bubbles. This is the way the world works." — Aswath Damodaran ([43:55])

Notable Quotes

• "There are no truly safe countries left anymore." — Aswath Damodaran ([06:36])
• "Markets are not driven by talk, they're driven by the economy and earnings." — Aswath Damodaran ([13:40])
• "Nvidia is an AI architecture. And if I frame out how much the architecture has to cost for Nvidia to be worth 4.4 trillion, I don't see economics." — Aswath Damodaran ([28:02])
• "Bitcoin doesn't meet any of [the requirements]... it's too volatile, it swings around too much." — Aswath Damodaran ([49:33])
• "I think that 95%, maybe 99% of the money in AI now is just pricing and trading." — Aswath Damodaran ([38:29])
• "People overreach, they correct, they clean up, and then they move on and another bubble forms for the next big thing." — Aswath Damodaran ([43:55])

Final Thoughts

This episode of Prof G Markets offers a comprehensive analysis of the intricate interplay between country risk, technology valuations, and the shifting nature of market predictability. Professor Damodaran's insights provide listeners with a nuanced understanding of the current financial climate, emphasizing the importance of fundamental analysis over market hype. As the landscape continues to evolve, staying informed and critically assessing investment opportunities remain paramount.

For more insights and discussions on capital markets and financial literacy, subscribe to Prof G Markets on your preferred podcast platform.