Markets are Ignoring Catastrophic Risks — ft. Aswath Damodaran

Summary

Prof G Markets – Episode Summary
Markets Are Ignoring Catastrophic Risks — ft. Aswath Damodaran
February 20, 2026 | Vox Media Podcast Network

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Overview:
In this episode, hosts Scott Galloway and Ed Elson welcome back renowned NYU Stern finance professor Aswath Damodaran for a deep discussion on why markets are currently ignoring the significant, escalating risks facing the global economic order. The conversation focuses on equity market valuations, the underpricing of catastrophic risks, the impact of AI on software stocks, the changing nature of investment vehicles, and how individual investors should navigate a climate increasingly defined by uncertainty. The episode is rich with real-world examples, candid insights, and engaging banter among the hosts and their guest.

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Key Discussion Points & Insights

1. Equity Valuations and Underappreciated Catastrophic Risk

   • [07:55] Damodaran reiterates his concern that while S&P 500 levels remain steady, markets are ignoring "the potential for catastrophic changes... greater now than perhaps at any time in the last 70 years."
   • He attributes this risk to the unraveling of the post-World War II economic order centered on the US and the dollar, with no clear successor system in sight.
   • Markets are "blowing by" these changes, relying on resilience shown during events like Covid but underestimating the pitfalls and corrections likely to arise.
   • Quote: "If you do bring in catastrophic risk, then the market becomes worrisome across the board... there seems to be too much acceptance that we’ll figure a way through this without serious pain." (Damodaran, [09:37])

2. Global Order and U.S. vs. International Risk

   • [10:23] The potential collapse/reconfiguration of the global economic order is not just a U.S. problem; Europe and the broader world benefited from U.S.-led structures is likely to feel the pain as well.
   • The transition from U.S. dollar dominance is seen as particularly fraught because no viable alternative yet exists.
   • Damodaran sees this as a period of adjustment, not of immediate collapse, with corrections anywhere from 10% to 25% possible as the new order is established.
   • Quote: "It’s not so much a collapse, but there's got to be a new economic order that comes out of this." (Damodaran, [11:21])

3. Markets’ Response: Rotation, Capital Flows, and Limits on Diversification

   • [12:07] Ed and Damodaran discuss the common investor response—to rotate out of U.S. equities into international markets—but Damodaran counters that many of the best-positioned companies amid business transformation (like AI) are American.
   • Even with capital flows leaving the U.S., dollar weakness has outsized effect, making performance of foreign markets seem better in dollar terms.
   • Quote: "There are limits to how much you can move out of the US without ending up being underinvested in businesses that are best positioned..." (Damodaran, [14:25])

4. AI Disruption and Software Stock Selloff

   • [13:23, 16:20] Recent sharp declines in iconic software companies (down 25–40%) are discussed. Ed and Scott propose it might be a buying opportunity.
   • Damodaran notes software companies are "ripe for disruption" due to "fat" margins but agrees that services like Salesforce and Oracle are sticky—with deep integration into customer operations.
   • Quote: "The adaptable companies in this mix will be the ones that make it... You're looking to see how they're incorporating AI into their product mix." (Damodaran, [19:53])
   • He advises investors to look for companies visibly cutting costs and adapting fast to AI-driven margin pressures, rather than buying the sector wholesale.
   • Quote: "Rather than buy an entire software basket, I would look at a subset... where you're looking at adaptability." (Damodaran, [24:19])

5. Private AI Companies (Anthropic, OpenAI) and Investment Implications

   • [28:11] Scott & Ed ask Damodaran about Anthropic and OpenAI’s sky-high private valuations, noting that the disruption in public software markets is not mirrored by corresponding gains in public stocks—since the AI disruptors themselves are private.
   • Damodaran prefers Anthropic over OpenAI given the egos at play, and doubts existing public valuations are justified.
   • Highlights a structural challenge for public equity investors: “The index has to reflect that loss, but it won’t reflect the gain.” (Damodaran, [32:54])

6. Navigating Uncertainty: Tactics for Investors

   • [33:46–35:01] Ed raises the issue of whether moments of widespread fear and confusion—such as the current software stock rout—are buy signals.
   • Damodaran counters that one can “have your cake and eat it too” by hedging index risk (for example, buying software but shorting S&P), though this reduces upside and is costly.
   • He summarizes human responses to uncertainty: denial, reliance on old mental shortcuts, outsourcing to experts (or “crowdsourcing” now), and prayer. But stresses the importance of systematic, research-driven investing in such periods.

7. Signals of Rising Catastrophic Risk: Gold, Silver & Political Cracks

   • [39:21] Damodaran notes gold and silver’s exceptionally strong year despite the absence of hyperinflation or deep market crises as a sign that level-headed investors are unusually risk-averse.
   • Emphasizes listening not to “doomsayers” but to typically rational voices raising alarms.
   • Recommends tracking measures like catastrophic insurance, high-yield bond spreads, and crowdsourced indicators.

8. Efficient Markets vs. Madness of Crowds, and the Rise of Prediction Markets

   • [47:33] Discussion of Kalshi and Polymarket. Damodaran says prediction (betting) markets aggregate information rapidly and effectively—sometimes outdoing pollsters and analysts—and thus are a useful barometer for investors.
   • On passive investing: Passive vehicles (ETFs, indexing) now account for over 50% of market assets, a historic shift.
   • Damodaran highlights the paradox: faith in market efficiency must be balanced with awareness that crowds can go mad and create exploitable mispricings—but recognizing and acting on those moments is psychologically hard.

9. Persistent Risks Beyond “the Trump Effect”

   • [57:44] Ed asks whether the current risk environment is just a Trump-era phenomenon. Damodaran argues that issues like eroding Fed independence and globalization backlash predated Trump and will outlast him.
   • Quote: "His going away is not gonna make them go away either. There are underlying political and economic forces that came in before he became president, will continue after he leaves." (Damodaran, [58:10])

10. Higher Education: Still Ripe for Disruption... But Not Yet Disrupted

    • [61:02] Scott calls out higher education as a classic example of a high-margin, unadaptive sector. Damodaran blames price-fixing, government loan support, and slow-moving cultural shifts for forestalling disruption, though notes MBA and grad programs are starting to see pressure.

11. Outlook for 2026

    • [66:57] Damodaran sees 2026 as likely a “flat or normal year”—with the real economy improving but markets underperforming expectations.
    • Quote: "This is a year where the economy is going to do better than we expected, but markets are going to do worse than people think." (Damodaran, [67:23])

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Notable Quotes & Memorable Moments

• "The potential for catastrophic changes is much greater now than perhaps at any time in the last 70 years.” – Aswath Damodaran [08:24]
• "It's not so much a collapse, but there's got to be a new economic order that comes out of this." – Damodaran [11:21]
• “I agree with you that the Salesforces of the world and the Oracles are much more sticky businesses than we let on. So if you look at them, the software is only a small piece of the puzzle... once they get adopted, they squirrel their way, if that's the right word, into your systems.” – Damodaran [18:19]
• “Rather than buy an entire software basket, I would look at a subset of software companies where you're looking at adaptability.” – Damodaran [24:19]
• “Private AI disruptors like Anthropic and OpenAI have sucked value out of public software, but that value can’t be captured by public index investors.” – Paraphrased from Damodaran [32:54]
• “Investing is all about faith and your faith will be tested. Might as well be open and honest about the fact... This is not a space where you can be absolutely sure about anything.” – Damodaran [36:48]
• “The dollar is wobbly. But I can't think of an obvious replacement for it.” – Damodaran [45:43]
• “Markets can sometimes do strange things up in the mood at the moment. And I think that tension continues. So even when you believe in efficient markets, you have to accept the fact that markets can make humongous mistakes.” – Damodaran [54:38]

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Timestamps for Key Segments

• 07:55 – Damodaran on S&P 500, equity risk premiums & today's biggest danger
• 10:23 – Global order, US vs. international impact, the pain of transition
• 13:23 – Software sector selloff & the dynamics of business transformation
• 16:20 – Sticky moats in software; are there bargains?
• 19:53 – Adapting to AI, what investors should look for in software stocks
• 24:19 – How to filter for adaptable companies
• 28:11 – Anthropic & OpenAI: Private valuations vs. public markets
• 32:54 – Value migration from software to private AI, and what it means for investors
• 39:21 – Gold, silver as signals for hidden systemic anxiety
• 47:33 – Prediction markets, Kalshi, Polymarket, and crowdsourcing risk
• 54:38 – Efficient markets, wisdom vs. madness of crowds
• 57:44 – Trump, the persistence of systemic/political risks
• 61:02 – Higher education as an undisturbed “disrupted” sector
• 66:57 – Damodaran’s 2026 market outlook: “flat or normal year”

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In Summary
This episode delivers a thoughtful, at times sobering examination of how global markets are currently priced for optimism, not for the significant systemic and political risks that have quietly been gathering steam. Damodaran provides guardrails for investors: look for adaptability, price in risk, and acknowledge that neither experts nor crowds are infallible, but good systems and humility will be your best defenses. The conversation is wide-ranging—touching on software, AI, prediction markets, gold, the dollar, and even higher ed—but always returns to the core issue: Are we ignoring risk, and if so, how do we play defense?

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For a deeper understanding or to revisit the full conversation, refer to the key timestamps above for each significant topic.

Transcript

[Scott Galloway]

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[Aswath Damodaran]

What does it really mean to be a neighbor? It's just everyday people, you know, it's just people who are retired. They have a couple hours in the afternoon, so they're going to do patrols. And it's people who are, you know, real estate agents, you know, driving around like, trying to track how ice is moving and alert neighbors when things are are not safe. The rise of mutual aid in times of crisis. That's this week on Explain It To Me. New episodes Sundays. Wherever you get your podcasts. When the political winds change, will there be accountability for those who bent the knee for the Trump administration? If these corporations think that the Democrats, when they come back in power, are going to play by the old rules and say, oh, nevermind, we'll forgive you, I think they've got another thing coming. I'm Preet Bharara, and this week Ambassador Susan Rice joins me to discuss leadership, decision making and the state of the

[Scott Galloway]

rule of law in America.

[Aswath Damodaran]

The episode is out now.

[Scott Galloway]

Search and follow.

[Aswath Damodaran]

Stay tuned with Preet. Wherever you get your podcasts.

[Scott Galloway]

Today's number, $792,000. That's how much Singapore is paying its athletes who win gold at this year's Olympics. Ed, why does Africa never win at the Olymp? Because it's a continent, dumbass. So racist.

[Ed]

I was going to say that, but I didn't want to ruin your joke. I couldn't tell if that could actually be the punchline.

[Scott Galloway]

So insensitive. You and your millennial white privilege. What'd you go to Princeton?

[Ed]

Listen to me.

[Scott Galloway]

Markets are bigger than us.

[Ed]

What you have here is a structural

[Scott Galloway]

change in the wealth distribution. Cash is trash. Stocks look pretty attractive.

[Aswath Damodaran]

Then something's going to break.

[Ed]

Forget about it. How about that Singapore number? 792K? It's pretty good.

[Scott Galloway]

I think they're getting the better end of the bargain because if someone from Singapore wins the Olympics. Did you know Singapore has mandatory national service similar to Israel? And Singapore is the most religiously diverse nation in the world and they very deftly decided that we are going to be so prone to ethnic violence with all this religious heterogeneity that we need to get people more focused on the flag. And so they decided to do national service.

[Ed]

I think it's a great move. You also go to jail if you leave gum on the ground. But is that not true?

[Scott Galloway]

That's actually not true. It's an offense. But I will tell you this, though. I was in Singapore about a month ago, and you have never seen a guy my age go through his luggage more carefully to make sure that that joint from two years ago wasn't floating around in a pocket somewhere.

[Ed]

Has that ever happened to you? You accidentally had some detritus?

[Scott Galloway]

Detritus?

[Ed]

Yeah, some leftover paraphernalia.

[Scott Galloway]

Detritus. I thought that was some sort of gum disease. I think I saw my periodontist for that. No, I usually. I have a very healthy fear of prison, and I don't travel with edibles or I do travel with prostitutes.

[Ed]

Gave in the luggage that was dark.

[Scott Galloway]

Just like the kind of guy who would think Africa is a country, not a continent. That was dark, Ed. No, I don't. I don't travel with edibles. No, I've never. I've never. I've had. I lose stuff at tsa. They don't find stuff on me. Although they did pull aside Drew one time when I went to Mexico and brought him with me because I needed, you know, my technical support animal, Drew Burroughs, to make sure that I could set up. And they pulled him aside, and they basically said he had to pay, I don't know, a couple hundred bucks or a couple thousand bucks to get our technical equipment back. But, you know, that's Mexico. That's just part of what you. You go through when you go to Mexico. But, no. Have you ever. Have you ever been caught with drugs, Ed?

[Ed]

That wasn't the point of that question. No, I haven't. Thank God. Have you ever been arrested? Have you ever gotten in trouble with the law?

[Scott Galloway]

No, I've never been arrested. I've never. I have been called several times by people who've arrested. I'm that guy they call because they assume I'm rich and that I know I have contacts. And so I get. I get those calls from prison. I've had three calls from people who've been arrested just in the last. Feels like the last year, but it's probably the last two years. Wow.

[Ed]

That's. They want you to bail them out.

[Scott Galloway]

Well, unfortunately, I learned this. There's not A whole hell of a lot you can do. What you do is you immediately try and call a lawyer. You go down to the station and all you can do is provide sort of emotional reassurance and have a lawyer lined up. It depends when it happens. I know way too much about this, which probably speaks to my friend group, but it's mostly stupid shit like DUIs and stuff, but which isn't stupid, which is dangerous. And Africa is a continent on a country, but there's not a hell of a lot you can do other than make sure you've lined up a really good lawyer. But I think people are under the impression, like, I'm going to show up with a bag full of cash and just spring them or something. It doesn't work that way. Sometimes you can just show up with a bunch of cash and make bail, right? But generally speaking, if you get arrested, they. What happens is you. Your lawyer says, well, he or she's going to go through the system and it's going to be a few hours or a day. What you don't want is to be in a smaller jurisdiction, arrested on a Friday after like 5pm because that means you're not seeing the judge till Monday.

[Ed]

This is good to know. This is. I. I did not know that. If I ever get in trouble with the law, I can hit you up. You won't bail me out, but you'll offer some emotional reassurance and line up with lawyer, which is all I need. That's great.

[Scott Galloway]

I'm going to come up with nicknames for your prison name and just make fun of you.

[Ed]

Honestly. White Bread. That would be great.

[Scott Galloway]

White Bread. Tasty Ed. Tasty Ed.

[Ed]

All right, shall we get into our conversation with Professor Aswath Demotor?

[Scott Galloway]

We should.

[Ed]

Let's do it. All right. Here is our conversation with Professor Aswath Demodoran, the Kirchner family chair and Finance Education and Professor of Finance at NYU Stern School of Business. Professor Demodoran, thank you for joining us once again on Property Markets.

[Aswath Damodaran]

Thank you for having me.

[Ed]

So last time you came on, it was probably our biggest episode of the year. It was striking to both me and Scott. It was striking to our audience. A lot of people were writing about it, a lot of people were talking about it because your view was that valuations across the board were too high and you told us that there was no place to hide in stocks. That was how you framed it. And we had a wide ranging conversation. And one of the conclusions that you put forward is that perhaps the traditional wisdom in stock Market investing was maybe not as true anymore, at least not right now. Based on valuations, you were looking at getting into collectibles. How has your position changed or not changed since we last spoke? Do you still believe that there is no place to hide in stocks?

[Aswath Damodaran]

If you look at the level of the s and P500 at the time that we talked in, I think early November, it's about the same level as it's today. The market's kind of flat, and it's. You know, we've had up days and down days. You had periods of cris. Here's my biggest issue. One is if this were the equity risk premiums that we're seeing in the market, what people are pricing stocks to earn is roughly what they were pricing in in 2005, 2006, 2004, going back in history. And I think that if you just looked at the numbers, there are ways you can justify it. You can say, oh, what's the big deal? The real issue that you face is I think the potential for catastrophic changes is much greater now than perhaps at any time in the last 70 years. Catastrophic changes in what way? I mean, after the Second World War, we put together an economic order centered around the US and the US Dollar, and that's coming apart. You can see an acceptance that it's coming apart. You saw it last week in the political discussions. You saw in Europe about where are we going next? But clearly the old system is coming apart. There's nothing to replace it. That's where the catastrophic risk component comes in, and the market seems to be blowing by, saying, it doesn't matter. We're gonna figure out a way. And just like we did on Covid, and maybe that's part of what's going on here, is people are saying, markets are resilient enough, they're gonna find a way, even through this dramatic change in how the global economy is run, to find the other side. And I think that what investors don't seem to be factoring in is there are going to be pitfalls along the way that have to get priced in. So my concern with stocks is not the 1999 level, which is, hey, stocks are crazy. You can't justify this pricing. We can justify the pricing. We assume that there's no catastrophic risk to worry about. But if you do bring in catastrophic risk, then the market becomes worrisome across the board. Whether it's Mag7, not Mag7, global equities, US equities, collectively, there seems to be too much of an acceptance that we'll figure a way through this without serious pain.

[Ed]

I'm already feeling bearish again. So I guess one thing I would push back on. It sounds like what you're describing is a collapse in the global order, the way the global economy is set up, which to me sounds like a US Problem.

[Aswath Damodaran]

I don't think so, Ed, and here's why. I mean, the US has benefited from the world economic order, but so has much of the rest of the world. Europe has lived in the reflected protection of the US for 70 years and essentially been able to focus entirely on economy building, leaving defense and the expense of defending Europe to the U.S. so this is not just a U.S. problem. The U.S. might have more to lose than everybody else because it's been at the center of the Post World War II economic order, but it's not just the U.S. i have a feeling that this is going to be pain that percolates in every direction. That this adjustment, it's not so much a collapse, but there's got to be a new economic order that comes out of this. How we get from where we are now to that new economic order is what we should be thinking about. And I don't think it's going to be as painless and as easy as markets seem to be pricing it. I mean, how do you go from the US Dollar as the central currency to something else? Because there's nothing else out there, right, that can replace the US Dollar as a global currency. So I think that that transition, more than a collapse, is what's going to be painful because there are going to be some businesses that are going to find a way to get to the other side easily, and other businesses are going to struggle more. But I think that struggle's got to be priced in more. And whether that means a correction of 10%, 20%, 25%, we can debate, because I think that that correction has to occur somewhere along the way as this transition plays out.

[Ed]

Do you think that the correction will be a function of a slowdown in the fundamentals of businesses all across the board, or is it more of a sentiment multiple problem that you're describing? Because the reason I bring this up is I feel as though a lot of investors in the markets are beginning to feel this. We're seeing this. We saw it at Davos. As you say, most people agree something about the world order is changing. We're seeing a lot more attention being paid to the deficit spending in the US and we did see a rotation in terms of capital flows last year out of the US or maybe out of the US is actually too harsh, but because the S and P did rise. But ultimately, you know, every other market besides the US saw big, big returns. You know, emerging markets up more than 30%. The, the world, minus US ETF, up 30% as well. To me, it almost seems as though one response from investors would just be, okay, let's just shift our capital allocation out of the US Invest a little bit more in Europe, invest a little bit more in Latin America. I don't see how this necessarily means that everyone's going to pull back wholesale.

[Aswath Damodaran]

It's not just a rotation in geopolitics, it's a rotation in business economics as well, which is, and you're seeing this with the talk of AI and technology changing businesses. And here's the conundrum that investors face. If it were purely a geographic graphical shift. You're saying let's shift out of the U.S. that's our problem. We're over invest in the U.S. let's invest elsewhere. But the problem is the businesses that are best positioned to take advantage of the business transformation happen to be US Companies. So if you're going to rotate out of the US and by the extension you're going to rotate out of technology and the big technological disruptors in the U.S. i don't see how you maintain balance. So that's why I don't think it's going to be. Last year, as you pointed out, The S&P 500 did well. The rest of the world did better. But much of that better came from the dollar becoming weaker, not from those markets delivering higher local currency returns. In fact, I computed the local currency returns and the dollar returns. The dollar returns are much more impressive because you get that extra 9, 10% boost in your returns if you're a European stock market, if you build in the dollar depreciation. So I do think we're going to continue to see some weakness in the dollar translating into the U.S. but there are limits to how much you can move out of the US without ending up being underinvested in the businesses that are best positioned to take advantage of the economic change. I mean, again, I don't mean to sound catastrophic, but I'm saying put on your seatbelts because they're going to be adjustments. And the question you asked about fundamentals and perceptions is a good one. And I'll take one sector where you're seeing this play out. Let's take software. If you look at the margins for software, last year, they stayed impressive. The gross margins were 75% they look very much like the previous year. Revenue growth was pretty good. But clearly the perception has changed. Software stocks are down 25 to 30% because there's a concern that AI is going to eat away at margins and I think it's well placed collectively. I think software is ripe for disruption because it's so fat, so so many layers of profits you can go after. But I think that when you get those corrections you're often going to get across the board corrections. The perception is going to mean marking down the price of all software companies but some of them are going to find a way through this disruption to emerge as winners. So I think the same process is going to play out at the market wide level which is you're going to see sell offs and then you're going to see people reexamining some companies saying hey, these companies are going to find a way in the new economic structure to be successes. So that's why it's going to be a back and forth, not going to be a one way adjustment where everything gets marked down, we stay down. It's going to be a process where markets are learning even as, you know, as things are unfolding what this process is going to do to company profits.

[Scott Galloway]

So aswath, let's double click on that. You've seen some of the most iconic software firms off 30, 40% and as a multiple on free cash flow, they're trading at some of them at all time lows And Ed's thesis, and I think I agree with him, is that it might be a buying opportunity because when I look at the, if I think of their integration in businesses, there's the tip of the iceberg is all right, what can be done using AI now, but below the surface is they have billing set up, they have ui, they have relationships with the company. I can't even imagine. Even My last company, L2, we used Salesforce to track our leads. The idea of getting just a sales team of five or six people to retrain them on another product, I don't care if it was 50% less expensive, we wouldn't have done it. So is this an opportunity? Have these companies been oversold? The Adobes, the servicenows, the Salesforces?

[Aswath Damodaran]

I think collectively yes. And I think that almost always happens when you have worries about a catastrophe. I mean I think back 15 years when fossil fuel stocks went into free fall, this was in the early years of ESG and Cope where people thought hey, this is the end for fossil fuels and they went into free fall and then eventually they recovered because it turned out that the threat was not to a core business of fossil fuels was still required. I agree with you that the sales forces of the world and the Oracles are much more sticky businesses than we let on. So if you look at them, the software is only a small piece of the puzzle. It's actually the least of all the competitive modes. It's the least of their modes. You could probably replicate their software pretty easily, but once they get adopted, they squirrel their way, if that's the right word, into your systems, your data, your processes, and they become part of your company. So it's not just replacing software, it's an ENT system. Here's how I think it's going to play out. And I think this is where the software companies are looking. The problem is much of what they do now with people, which is what the expensive part is to track. These processes can be done by AI, and they're offering AI products that effectively do what their regular products are doing. But I think one of the mistakes they're making is what brick and mortar retail firms initially made with online retail, which is they worry about cannibalization. So they go in full force with an AI product, even if it's a really good one, the same way that somebody who has nothing to lose can go in. So I think what you're looking for as an investor is which of these companies are using AI in a way that they're willing to give up their existing product sales and replace them with AI. Those companies will make it. And which of the companies want to have their cake and eat it too? Which is sell their existing products, charge the prices. They do get the high margins and offer AI as a side project product, but they're not willing to jump in. So I think that the adaptable companies in this mix will be the ones that make it. As an investor, you're looking to see how they're incorporating AI into their product mix and into their business. My prediction is the first thing that's going to get hit in software is not the revenue number, it's going to be the margin number. You're going to see margins come down even at the companies that survive. And it's been a long, great run for software. I mean, I invested in software in the 1980s when it was first coming out. It's been 40 years of really great margins. And I think that in many ways, like every other business that gets disrupted, there'll be a new steady state of lower margins, perhaps greater scale with AI, things that you could not do with traditional software. And some companies are going to navigate that that divide better than others. I mean, I think the B2B companies have to be more wary because costs are going to drive a lot of choices. B2C companies, I mean I own Adobe and I will hold onto Adobe even through the down days because I think it is a more robust software model because of what it does. I could be completely wrong, but I think we need to. You're right. I think right now it's a broad brush. All software companies are getting sold off. But I think that I would track not just what these companies deliver as earning because that might be too late to get the signal, but what they're doing in terms of product mix. Given that this requires talking to customers, the more you can talk to people who buy their products and services and ask what are they offering with AI? What's different? How's the pricing of their AI products will give you some insight into which of these companies are going to come out as successes from this and which of these companies are going to falter and fail.

[Scott Galloway]

It strikes me that they're just going to come under pricing pressure. And if you think of 10 or 20% of their expenses are related to people who have a CS degree from Carnegie Mellon actually building the product with software, what's to say that they won't be able to reduce that expense internally, pass on the savings to their clients while protecting their margins? Because as someone who sat on on boards of software companies and software has been the gift that keeps on giving. We're going to grow our revenues 11% and we're going to grow our employment 8% and our EBITDA 12 to 15%. That's generally the story of software for the last 30 years. My thesis is there are so many fatty deposits that can be easily taken out of these software companies and they can pass those savings on. While it might be a hit to their top line and like you said, I think their margins and their cash flows. It just strikes me the last time we spoke to you, we had a difficult time zeroing in on what felt like a buying opportunity. And our thesis has been that if you were to buy a basket of these software companies that have shed half a trillion to a trillion dollars, that you'd be that this. It feels like the first buy signal in a while.

[Aswath Damodaran]

I think what you're describing is what I would call an adaptable software company. You're saying the software companies that adapt to this adj their cost structures quickly might be able to keep their margins high. And that's a plausible pathway. But we've been around organizations that have to downsize. This is a very different game for them than the game they've been playing. And some of them, I think, are incapable of playing the downsizing game very well because they're just not used to it. So maybe the things to watch is which software companies respond quickly and start reducing their workforces, adjusting their costs, and you're going to start to get that information pretty quickly, and those will be the companies rather than a basket of alts. So maybe we need to create a basket of software companies where their operating expenses have dropped by 10% in the last two quarters. That might be a better basket to focus on than basket of all software companies. Because I remember writing about disruption 20 years ago, and I said, look, if you want a perfect target for a disruption, you want to pick a company with high margins. It's incredibly slow to respond to change because they keep. I mean, we've seen. I mean, you know, we know we're in a business education where you see how slow change is. If software were run like education, then we can safely predict that software would crash and burn. That in a year or two or three years from now, there'd be no business. I do think that the more inflexible you are as a company, the less you learn from what's happening around you, the more danger you're exposed to. So rather than buy an entire software basket, I would look at a subset of software companies where you're looking at. At adaptability, how quickly they're adjusting to costs and adjusting their cost structure down and keeping their margins stable. And that subset, I think, is where you'd go if you wanted to buy these companies.

[Ed]

We'll be right back after the break. And if you're enjoying the show so far, send it to a friend. And please follow us if you haven't already. Support for the show comes from Quince. Looking your best isn't about staying up to date on the latest fashion trends. In fact, when you do that, you're just guaranteeing that your style will look dated this time next year. Instead, you should intentionally build your wardrobe over time with pieces that are meant to last. With quints. You've heard me talk about quints before. It's the place to find everyday essentials that are built to last. Items like organic cotton sweaters, polos for every occasion, lighter jackets that keep you warm in the changing seasons. Quince only partners with factories that meet rigorous standards for craftsmanship. And ethical production. Quince was kind enough to send me some of their clothes. I got a sweater which I absolutely love. You've actually seen me wear it on the podcast. I think it feels great. I think it looks great. So I would highly recommend recommend Quince myself. So refresh your wardrobe with quince. Go to quince.com markets for free shipping on your order and 365 day returns. Now available in Canada too. That's Q-U-I-N-C-E.com markets, free shipping and 365 day returns. Quince.com markets

[Scott Galloway]

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[Aswath Damodaran]

it's

[Robin Arzón]

time to level the up. I'm Robin Archison and I light fires. I'm an executive founder, best selling author, ultra marathoner, mother proud Latina and I'm not done yet. Announcing Project Swagger, my new weekly podcast, your Transformation toolkit. I'm going to cut through the noise and give you actionable takeaways each week in under 30 minutes. Elevate your hustle with routines, strategies and mindset shifts that I have pressure tested. I have burnt down this Beyonce candle like all the way to the bottom we have been trying to manifest. Carbs are not the enemy. I probably have a piece of bread or a bagel with me at all times and I am not exaggerating. Tune in on February 24 for episode one building the skill of self talk. This is the foundation. Follow Project Swagger wherever you get your podcasts. Let's go.

[Ed]

We're back with Prof. G Markets.

[Scott Galloway]

I want to focus in on two companies to the two biggest LLMs, Anthropic and OpenAI, which I would argue are technically public companies. You can buy shares in the secondary market. I believe anthropic's raising at 350. OpenAI I believe is trying to close around at 850. Yeah. I'm curious what you think of those respective valuations on the companies. And our thesis has been that Anthropic is actually, I don't call it underpriced, but we think that there's going to be a flip in valuation, that Anthropic has more momentum, more enterprise, and that OpenAI is a bit more consumer, more vulnerable. And quite frankly it's just endured a lot of negative PR which feels like negative momentum. Have you looked at either or both of these companies in their respective valuations?

[Aswath Damodaran]

I think I pick Anthropic purely based on the ego of the people running the company. This is a space where I think if you have smart, egotistical people running the company, you're in danger because they're going to overplay their cards. And with Sam Altman, my feeling is he might be a smart guy, he might have a good set of cards, but he's always going to overplay those cards because he believes his cards are better than they truly are. So from a pure because this is going to be a space where you require managers again, the adaptable word comes in to learn from what's going on and change the way they behave. I'm not sure OpenAI is capable of that learning and change that Anthropic is. I mean, I find to be quite honest, from an intrinsic value standpoint, I would be hard pressed to invest in any of these companies at the existing pricing because collectively the pricing just seems too rich to me. But on a relative basis, if you need an LLM in your portfolio, you're much better off with. I mean Anthropic is lucky in terms of who it competes against. OpenAI, you know, I mean basically you can go down the list and it now given it's, you know, that peer group, it might be the best of the LLMs to have in your portfolio if you want one in your portfolio. I'm not particularly eager to have any of them in my portfolio. So for me they all look pretty richly priced. But if you force me, I'd Pick Anthropic over open air AI.

[Ed]

One thing that's so interesting about this dynamic is the fact that they are both private, which seems like a setup that we've never really had before. The idea that the two largest names in the largest, hottest space in the world are not publicly traded.

[Aswath Damodaran]

Are you bringing in XAI into the mix as well?

[Ed]

XAI would be another example as well. And I think one thing that has been kind of frustrating for me as someone who follows the markets as an investor as well, we saw this gigantic destruction in value in software as a result of these AI tools. $2 trillion in market value just erased over the past couple of weeks. Because the idea is Anthropic is going to change the game. OpenAI is going to change the game. And yet I haven't been able to see how those stock prices are moving. I mean, presumably you'd think, okay, well then did the $2 trillion just get transferred to OpenAI and anthropic IS. That's what's happening. But I don't know know because they're private. So I'd be interested to hear your views on how new this is and how this changes the dynamics of being an investor when we are seeing one of the largest technological revolutions in a, in a really long time.

[Aswath Damodaran]

This is a process that's been unfolding for 20 years now. This private market, a gray market, almost not quite public, not quite private, where you get public market investors. I mean, I think of Uber raising when it was $65 billion, raising money from Fidelity and T. Rowe Price and the Saudi investment fund, effectively looking like a public company on many dimensions. But staying private. The problem with staying private is there might be pricing out there, but it's often stale and it'll often lag the real world. It would be nice to Observe what the LLMs are being priced at. But I think there's your initial lead in, I think was a very critical one. You talked about value destroyed in one business and a value creating another one. And one of my problems with the AI pitch for much of the last two years was, hey, look at all the good stuff that'll come from AI. We gave the market the benefits of all the good stuff that came from AI. We pushed the market up, but nobody seemed to be talking about the disrupted and what it would mean for them. So software, in my view, is the first card to be dealt out of that deck. And there'll be other cards that come. I mean, how much is Accenture going to be worth when AI becomes as powerful as if AI advocates are right about what it can do. There are a whole host of other businesses that are ripe for disruption just like software is. So I think this might just be the opening lead in into a play where we see what happens to disrupt it. The disruptors are off the market, so that's not good for the overall public equity equity market because if the disrupted show up as a decline in public equity value and the private companies are not part of the public equity market, the index has to reflect that loss, but it won't reflect the gain. So if nothing else for the health of the equity market, you're hoping that these companies go public because then at least you can get a more complete accounting for both the pluses and the minuses.

[Ed]

Yeah, I mean, when these moments like what we saw in software occur, our view, at least on this podcast, my view has been this is when you want to start getting active in the markets. Because it seems as though there is so much uncertainty, there's so much confusion, so much fear about what may happen that people kind of throw their models out of the window and they kind of, more simply speaking, they act a little bit less rationally. They're not projecting cash flows in the way that they were in the past because they're just so frightened about what may be or what may not be. And to me those seem like the moments where you want to buy, but. And that's what I did, by the way. But also in my head is your voice saying that actually the whole thing is overvalued, that there's another layer of risk, another layer of catastrophe that isn't being acknowledged, that isn't being priced in yet, which makes me think, well, am I thinking too small here? Here? Am I making a mistake by looking just at software? Should I be looking at the entire world and the fact that there is an entire global order that could collapse here and what might that do to valuations?

[Aswath Damodaran]

You can have your cake and eat it too, Ed. You can buy software and sell short on the index if that is what you're concerned about. If you feel confident enough that your picks net are going to be good picks after correcting for the market right risk. So that possibility exists, but it is costly to do it. Buying insurance against market collapses is always costly. But if that concern becomes large enough that it's getting in the way of you investing, then my suggestion is buy those stocks in this disruption that you think are being beaten up too much and buy protection against a market correction at the same time. And that no That's a possibility that didn't exist 40 years ago that you can do relatively easily today. So I think there's a way you can do this, but then you're going to be giving up some of your upside if markets continue to go up. And it'll give you that self assurance of, hey, I did the right thing, I'm going to win on my winners, but the market is not going to take me down, even though I was right on the companies that I picked. Now, I think that you're right about the uncertainty issue. I do a session on uncertainty where I talk about the most common reaction human beings have investors by extension have. The first is denial, which is you say, what uncertainty? I don't see any uncertainty. The second is mental accounting, which is you do something that worked for you seven years ago in another uncertain setting. You know, it's completely different, but you do it anyway. The third is outsourcing. What do you do? You ask McKinsey what to do. You ask Goldman Sachs what to do now, which is what a lot of people are doing with AI. I have no idea. As if the Goldman Sachs AI analyst is some special insight side. And the fourth and the most, you know, the most, the oldest response to uncertainty is you get down on your knees, you look up to the heavens, say please God, tell me where to invest. I think that those are things that people do all the time. But I do agree with you that it's during uncertainty that the payoff to being systematic, to trying to do your homework is greatest. Because that's when market mistakes explode. So whether it's software in this first round or something else in the second round, I would look at the sector and then start to go through the sector and start to separate the adaptable from the non adaptable. Because there will be companies that get through this and come out not just intact, but perhaps as winners because you'll have fewer players left in the game, they'll have less competition after this thing plays out. So I agree with you on that. But it's not for the faint of heart. It is going to come with a lot of ups and downs, more downs initially than ups. I describe investing as an act of faith. Faith that you're right about your assessment of value and faith that the markets will adjust your value. Faith. Because if you ask me to prove that a particular software company is cheap, I can't do it. And if you ask me to prove that even if it's cheap that the price will adjust to that value that you got, I Can't prove that either. Investing is all about faith and your faith will be tested. Might as well be open and honest about the fact. Anybody who claims that they have absolute certainty that software is undervalued, they're jumping in. I have zero interest in following. This is not a space where you can be absolutely sure about anything. You're going to be wrong and you have to be willing to admit when you're wrong. And that's the other thing I'd build into investment philosophy. What are the things you're going to track to see if your investment bet is playing off? So maybe layoffs are the thing you want to track and the company that you're doing acts like nothing's happening. It's in denial. Maybe no matter how good it looked to you at the initial round, you might say that's not the company I wanted. So being willing to say I was wrong and go back and revisit the company you picked might be an integral part of this strategy working for you

[Ed]

in the long term on the catastrophic risk that you feel that is underpriced right now or that investors are not paying enough attention to what are some data points or signals or events that have led you to to believe in this notion that there are greater risks than we really understand.

[Aswath Damodaran]

I'm going to give you a strange answer. I've never been one to track the price of gold and silver, and last year was a phenomenally good year for gold and silver. Gold was up almost 70%. Silver was up 150%. But what made it so unusual was gold and silver usually go up either during periods of hyperinflation, not just high inflation, but hyperinflation, inflation, 1970s or during severe market crises where markets are down 30, 40%. Neither was true in 2025. So you think why did they go up? There's a segment of the market that has always been into the gold and silver. They form the base of the market. They hold gold and silver and that's all they hold. What makes gold and silver prices go up is that market segment gets bigger by attracting people who normally invest in stocks and bonds. So I think that when I at the people who are warning me about catastrophic risk, it's not the usual doomsayers, not the guy on Times Square saying the end of the world is coming. These are people who are normally pretty level headed who talk about equity. So one of my worries about catastrophic risk comes from the people who are warning about catastrophic risk, who are not normally people who do this. I mean, there are people who've been yelling the end of the world is coming for 17, 16, 20 years. I'm not interested. These are people who are not normally in that group, who are in that group. At the same time, you get these fissures show up in politics that you've never seen before, and those things will ultimately play a dink. Whether it was the tariffs or whether it was NATO's challenges or what's coming next. I think that those are things that are small cracks at the moment, but they're cracks that could very quickly become much bigger issue. So it's a collection of things, not one particular thing. But you can start to watch, for instance, the price of insurance against catastrophic risk and start tracking, because insurance companies are going to catch the people who are most, you know, most exposed that catastrophic risk soonest because they're going to try to buy protection. So I'm going to try to keep my eyes on those potential indicators. So, you know, high yield bonds. So the rates on high yield bonds tend to go up when people start to worry about catastrophic risk. That hasn't happened yet. So maybe those will be the advanced indicators is when you start to see those prices start to go up. You have to start thinking about creating protections for yourself against that catastrophic risk.

[Ed]

Is that not kind of an example of the outsourcing that you describe? When there is uncertainty, which is you're, you're not necessarily looking at the catastrophic risk in and of itself. What you're describing is there is a feeling out there and investors are kind of saying and showing.

[Aswath Damodaran]

Absolutely. But here's the difference. Outsourcing traditionally has been to call in experts and ask them, what's the catastrophic risk? I'm suggesting crowdsourcing that. And basically we're doing for a catastrophic risk what we've done for, for restaurant reviews, right? We no longer read the New York Times Restaurant Review. We go to Yelp. And I think this draws on Phil Tetlock's argument, which is if you're worried about big risk, don't listen to the experts. They're going to kind of misestimate that risk. Focus on a crowd estimate of that risk. And I think that that's basically, that's the difference. You are out, because what other choice do you have? You can do navel gazing and try to assess that catastrophic risk, but the truth is you will never have enough, no matter how much you read, to make that assessment. Let the crowd do it because they're going to get that collection of knowledge coming from very different parts of the world in very different businesses making the judgment. And you're absolutely right. You have to crowdsource some of your work, otherwise you're going to drive yourself crazy.

[Scott Galloway]

So a couple questions. The first is you mentioned or referenced the dollar and while the Trump administration and investors will highlight that the S and P was up, I think it was up 17% last year. If you adjust for the dollar's drop in value against other major currencies, the S and P underperformed almost every other major market. And it does feel as if the US dollar is under attack. And the catastrophizing around the dollar losing its status as reserve currency. Rumors of the dollar's demise have been greatly exaggerated, except it does feel wobbly right now. Curious to get your thoughts on the dollar and how it intersects with different markets.

[Aswath Damodaran]

I think it is wobbly because I think it's wobbly for multiple reasons. One is concerns about the Fed and inflation play out in what currency you trust. Part of the trust in the dollar came out again. Or that post Second World War acceptance of the dollar as a replacement for gold. I mean that's effectively what happened is the gold standard is the dollar standard. And the dollar standard was accepted initially because the dollar itself was convertible into gold longer than any other currency till 1971. 70, technically convertible into gold. I think that more you worry about inflation and central bank independence, the more you worry about the currency as well. So that's one component. Second is you can't separate the economic from the political. The dollar centrality here in the global economy came from the US being the policeman for the world, essentially being a center of global political universe. And what you're getting not just in the U.S. but across the world where countries are stepping back into their local domains and saying, look, this global stuff, it's not for us. Even though I think it's too late to kind of step back from it. I think that's going to play out in the dollar being the international currency of choice. So it is wobbly, but what keeps it there is what do you replace it with? Because if you look at every other choice, it comes with a whole load of issues as well. Right. Are you going to replace with the euro? I'm not sure you want to go there because the euro has its own fr. Are you going to replace it with the Chinese Yuan? I don't think people are willing to make that transition either because you feel like you're jumping out from the frying pan into the fire. So what keeps the dollar there is. There is no obvious alternative. Maybe there will be one that gets figured out. Maybe the dollar will revert back to being a currency that people trust. But I think that right now the dollar is wobbly, but I can't think of an obvious replacement for it.

[Ed]

We'll be right back. And for even more markets insights, please sign up for our [e-mail] Subscribe. Before Minnesota, Illinois basically wrote a playbook on how to fight back against Trump's ICE crackdown. Governor JB Prince Pritzker told everyone in the state to take action when ICE came to town. Pull out your phones, film everything. They're shooting moms in the face.

[Scott Galloway]

Yeah.

[Ed]

So peaceful protest seems like the least you could do. And what we should be encouraging people to do. They, they've, they, you know, they've shot somebody here in Chicago five times for just observing from her car. Illinois created an accountability commission, took ICE agents to court, and when Trump sent in the National Guard, they blocked them from the streets and they won. A model for Trump resistance on the state level today explained drops every weekday and now Saturdays too. We're back with Prof. G Markets.

[Scott Galloway]

I'm trying to get insight into a political race or, or earnings estimates. I would go to either pollsters or I'd go to, you know, name the bulge bracket investment bank analysts to try and get some insight.

[Aswath Damodaran]

Not the culture Poly market.

[Scott Galloway]

You read my mind. And now I find myself increasingly going to Kalshi and finding it is increasingly a better predictor. The wisdom of crowds. One, what do you think of this phenomena? And two, two, what do you think? Kalshi and Polymarket are both kind of threatening or flirting with the idea of going public. And we've seen a massive, I think, transition of market capitalization from the betting companies to the prediction markets. So one, your view overall on a meta level of these prediction markets and two, looking at these companies as potential stocks to own.

[Aswath Damodaran]

It goes back to what I said to Ed earlier about the catastrophic risk assessment that the crowd judgment is more reliable than experts judgment. And what I think you get with both culture and poly and both have their own frictions and issues that we have to get through is you're getting a crowd judgment and that crowd judgment. I mean, these markets are not always, not every cult sheet market is a good one because some are very liquid and lightly traded and one big trade can move it. But if you take the big I track both culture and Polymarket during the, the presidential election and actually I wrote a piece about how well or badly they did against you know fivethirtyeight.com and all the other sites, the pollster sites. And they clearly conveyed information much more quickly. They responded much more quickly to what was happening in the ecosystem and with a lot less bias. In fact, I recently saw a study where they compared, I think culture and polymarkets predictions for the Fed rate corrections and rate adjustments relative to experts. And they discovered that they did better than the experts did at forecasting things that they should have the most expertise in. So I think that they will continue to evolve and play a role. They comes with a whole host of things we have to deal with in terms of potential side costs, right? I mean, you see this in sports betting, right, with FanDuel and DraftKings allowing you to bet on small piece of things. It's also brought problems with people playing games with it and effectively exploiting it to take advantage. And I think that's going to come. But I do think that they will continue to prevail and grow because they deliver better predictions. Now when they go public, will I buy into them? The question is, what's proprietary about what? Either does they have a platform, a lot of players, and I think there's a stickiness there for the moment, but I think, I think the stickiness is not deeply embedded yet. Both are very young platforms. So if you came up with a third platform with lower transaction costs and ease of trading, that might be my concern. I think the overall business is going to grow, but the companies that end up dominating the business will be a shifting target. Cause I think it's still evolving as to what the competitive advantages are in these markets and which one you would want to bet on if you wanted to bet across them. I mean, Kalshi's initial benef was Polymarket. I think for a long time required you pay. You know, it had to be in cryptos in a different setting, the transactions costs involved were greater. But I think that we will continue to see the transaction cost issue come to the forefront and how well these markets are actually structured because they have a lot of testing to go through. They're still very young markets and they haven't been quite tested in terms of the prices that deliver. But on both counts, face it, the original crowd judgments came from financial markets. I mean, it's in a strange way people are making a case for market efficiency that was done in the 1960s, which is given a choice between trusting an active money manager or trusting the market. Which one would you go with? The early University of Chicago judgment was go with the market. It's a crowd judgment. 60 years later, later, through a different route, we've arrived at the same conclusion about a whole array of things we do out there that are predictions where the crowd judgment is replacing the expert and delivering a better result.

[Scott Galloway]

Are you saying that you would have been better off in the 60s just buying the S&P versus going into the alternative investment market with its fees?

[Aswath Damodaran]

Absolutely. The only reason you didn't know you were better off was you got one statement every year from your mutual fund saying, look how well we did it for you. We made 9.8%. You had no peer groups to compare. I mean, active investing has always been problematic. It's always underperformed the s and P500 or the index of that's best suited to compare it to. But for a long time, that underperformance was not clearly visible to many people invested in. And the choices that you had were limited. Until you get to this century. If you didn't like the way your mutual fund was run, you had to buy the s and P500 index fund. It was that or nothing. Today you can buy an index fund that software. You can buy an index fund of software companies. You can have ETFs. You've now created passive investing choices. And I think that it's opened the door for active investing to get disrupted and has today. If you look at market share of passive investing vehicles, ETFs and index funds, funds versus active investors, for the first time in history, more than 50% of the money in the market comes from passive vehicles, which carries its own consequences. And you can have an entire session talking about what those consequences are, but it is, in fact, always been true. But now we can do something about it.

[Ed]

I feel like what we're describing is a respect for the efficient markets hypothesis, which is the idea that markets are the real experts, because markets are translating and filtering through and communicating all these different signals, all these different data points. And so, generally speaking, the markets are the best at pricing in and predicting the future, which is something that I generally agree with. At the same time, I also know that you are someone who doesn't always believe in that hypothesis. An example being you believe that in certain situations, valuations can be too high and that certain risks are not being properly priced in or appreciated by markets. And I find this to be one of the difficult things in investing. It's kind of a paradox. It's like, on the one hand, we have to respect the predictive powers of markets. On the other hand, sometimes every once in a While we might think, actually I think they've got something wrong, I think I know something that the crowd doesn't. So I guess my question for you, how do you decide which one to believe and when you should believe one or the other?

[Aswath Damodaran]

It's a great question because in many ways it creates a tension between the wisdom of crowds, which is the heart of all crowdfunding, which technology is bought in full time into, and the Madness of Crowds, which is one of my favorite books. It goes back 200 years, which is crowds can sometimes do strange things up in the mood at the moment. And I think that tension continue. So even when you believe in efficient markets, you have to accept the fact that markets can make some humongous mistakes because the crowd basically does the wrong thing. And the question is, can you take advantage of those mistakes? Right. I think when you talked about what it is that makes markets special, it's two things. One is that markets are aggregators of information. I remember a story that Gene Farmer told me in the early 80s. I was his TA for. I was his RA for a couple of summers when he came to UCLA and gene farmers, of course, won the Nobel Prize for his efficient market work. And he said, if you have a market, we have 100 people, each of whom brings in one small piece of information. The market price. Markets are unwell will aggregate that information because each person will trade that piece. So it's an aggregator of information. And the second advantage markets have, you're putting money behind, behind your words. An expert gets on cnbc, you can say whatever you want, right? There's no money behind it. You can say outrageous things because you know that if that event happens, even with small, you're going to look like a guru, an expert because of saying it. Markets have real money in their aggregators, but markets can go off the tracks. And it's a tension I face every day as an active investor. Of course, if you invest in index funds, you basically made your choice. You're saying madness versus wisdom. Wisdom wins out over madness in the long term. I'm incapable of catching that madness. When it happens, I'm going to go with index funds. The very fact that I actively invest in stocks means that I hold onto the hope that when there is this madness and it happens, I am able to overcome my own psychological issues. Because when crowds go mad, it's very difficult to actually go against the crowd. You're cutting against the conventional wisdom. So right now you buy a software company, everybody's saying, what's wrong with you? Why would you buy this disrupted sector, you got to live with that psychological discomfort. But if you can do it, I do think you can take advantage of the madness of crowds, But I can't offer guarantees. That's a faith part now. So it's entirely possible you could try and try and try and have nothing to show for it 50 years from now, after 50 years of activity investing,

[Ed]

just going back to the catastrophic risk, which, I'm sorry, I'm a little obsessed with right now. One thing that I keep on thinking is markets may look very different in three or four years if Trump is out of office. It seems that a lot of the concern and the uncertainty and the risks that are being discussed right now, whether it's because of what we're seeing with Davos, or the increased deficit spending in the big beautiful Bill, or.

[Aswath Damodaran]

Or

[Ed]

threatening to invade allies of NATO nations, et cetera, et cetera, it's all very much a Trump story that seems to be driving a lot of the uncertainty, which makes me think, well, if Trump isn't in office, then maybe we live in a very different world. But then the question, of course, becomes, is this permanent? Have things changed for good? What is your view on this question?

[Aswath Damodaran]

I think a lot of the time, things that Trump has kind of pushed the front of, things that have been evolving, happening under the surface before, he's been somebody who's pushed it to the forefront. Let's take an example, right? The independence of the Fed. I think Fed independence has been chipped away gradually over the last few decades, partly because the Fed's become too full of itself. Too full of itself in what way? I mean, the Fed actually seems to have bought into this notion that it can set interest rates, it can drive the economy. And, you know, you can go back and blame alan Greenspan in 2001, saying, I will not let the US economy go into recession after 9, 11. Now there's the hubris of central banking kind of caught up in its own sales pitch. So the independence of the Fed has been slipping away. The minute the Fed decided to put itself into the public domain. I mean, I tell people 40 years ago, if you'd asked me to name anybody but the Fed chair, chair, I wouldn't have been able to name a single person on the Fed. The FOMC today, they're all making speeches, they're on cnbc, they're touting their own different views about where the market is going, I think. So the independence of Fed has been an issue well before Trump came along, of course, he's Pushed to the forefront with his back and forth, Jerome Powell and what Kevin Wash is going to do. So you take tariffs again, you can say this was Trump's doing, but this is something thing that got kicked into process about a decade ago when the blowback to globalization started politically first and then economically, where people said, you told us globalization was going to be great for us. And I'm talking about the people who were disrupted in the global. So if you think of globalization as a disruption of how business were run, they were disrupted there, but they were often forgotten. They ended up becoming the drivers of political change. So starting the first Trump election, but with Brexit, you can go through a whole series of political movements. You can argue that this unraveling or at least the pushback against globalization was something that happened before Trump. So I think in many ways, as you see Trump push these issues to the forefront, his going away is not gonna make them go away either. There are underlying political and economic forces that came in before he became president, will continue after he leaves. And I have a feeling that 2028 and 2030, you might not be talking about Trump, but you might be talking about somebody in Europe who's risen to the top of the ranks, who brings Trump like attitudes towards globalization and global economy. This is a shift that I think will outlast Trump. And we have to adjust to a different world order than the one we were used to 20 years ago or even 15 years ago, years ago, you'd

[Scott Galloway]

mentioned high margin company that hasn't innovated, it doesn't adapt very quickly, is ripe for disruption, obviously ground zero, you know, check, check, check higher education. And yet applications up, margin, power up. Is it the fact that we have a duopoly? Is it. Is it artificial scarcity? One, I do not see anything resembling disruption in the numbers. And two, is that a dangerous thing to say? Like, what are your views? I just looked at all the data on applications. There are some things happening. People want to send their kids south. They don't want them to send to a protest. They want them to go to football games and join fraternities and sororities, not protests, is how I read the only thing I sussed out of the application trends. But I see no, nothing. Nothing indicating any sort of disruption that I won't say you've been predicting, but I've been predicting for a decade.

[Aswath Damodaran]

I think two things. One is the price fixing in college education is obvious. I mean, in a world which is competitive, you should expect to see tuition vary from 15,000 at some schools to 100,000 for others. Right. I mean you don't see that so clearly. There's clearly price fixing. The second is the federal government has subsidized this price fixing with its, I mean look at the size of the student loan. It's trillions of dollars. That combination has insulated universities from feeling the consequences of their own. So if you raise tuition by 6% and any other business, you should see some blowback. But the way the system is structured is it's been buffered. Now I do think that you're seeing the change in graduate schools, MBA programs, increasing number of one year master's programs. So what's the big people look at two years and saying that's $200,000 and unless I'm going to go work for an investment bank or an hedge fund, how the heck am I going to get my money back? So you're starting to see, so I

[Scott Galloway]

need to moderns class but I don't need Galloway's, is that what you're saying?

[Aswath Damodaran]

But I think in one year you can, they can take both our classes and dispense with a lot of other classes. And you're seeing this as stern as a bunch of nine month programs focused on fashion and entertainment. Because there's no way you can get a two year MBA and get your money back. If you're going to go back into fashion or entertainment, there's not enough. So I think that's where you're going to start to see things. A four year is going to come under pressure, maybe go to three years and then the graduate schools are going to get shorter because you have six years. If you have undergraduate and graduate and you pay full tuition along the way, I don't see how you make your money back. It's just not going to happen. The second is there's a lagged effect. We're still preparing our kids for the white collar world that dominated for the last 30 years. You don't want your kid to be a factory worker because you saw what disruption did to them. But what AI is doing in a sense is it's disrupting. But that effect is going to take a while to start to show up. So maybe in the next generation people will be pulling their kids out of college and sending them to plumbing or electrician school because that's where the payoff is going to be greater. And that might not be such a bad thing for, for the world actually to have fewer people going through four year programs that teach them very little in life skills that they can actually use to make a living. But it is going to be slow because it is, you know, the parents often still make the choice of whether you go to school or not. It's not the kids themselves. I have the feeling that the disruption would have been lots, lot faster if kids bore the costs. And then they said, how am I going to make my money money back? You know, so we, you know, as a parent, I buffered my kids from having to deal with the. I, I admit it openly and I did it because I wouldn't want them to worry about having the money to go to college. But maybe that's not a good thing because in, in a sense they can now take. I mean, I heard, heard a couple of college students the other day talking about why would anybody graduate in four years, you know, take an extra year. That's when you have fun. If you actually, that's a lot of money to have fun. An extra $150,000. If you had to pay that money, would you stay for a fifth year? I don't think so. So I think that we've insulated the people in our universities from the financial consequences either with parents paying for the tuition or the federal government coming in and giving them financing at the tuition. It'd be interesting to see because I think there was a cap that was put on the tuition aid at 50,000. A number of universities this year have actually lowered their tuition to match the federal cap at 50,000. So you could qualify for that. It'll be interesting to see whether there are things that the government can do to kind of drive down the cost of university education. But the problem is for that to happen, universities can't keep that. You teach three classes a year and you take the seventh year off for tenured faculty. So there's a whole system that's been built on a tuition that you can pass through to students that will not survive if you alter that system. So this year was a terrible year for econ, for PhDs, looking for new faculty, new jobs. The market for PhDs has dropped off significantly. So you're going to start to see that play out first and then maybe the ripple effects. But you're right, Scott. You and I have been calling for the disruption, but I think it's been such a slow motion disruption that you don't notice it inside the universities yet. And until that pain is felt inside the disrupted, you're not going to get change.

[Ed]

Final question from me, outlook for 2026. I mean, if you look at the US stock market right now, perhaps even looking at emerging markets, maybe European markets. But I guess I'm really interested in what you think is going to happen, happen to US Stocks by the end of this year. What would be your outlook?

[Aswath Damodaran]

I think we're due for, if not a correction year, a flat or a normal year. I have a feeling that this is a year where the economy is going to do better than we expected, but markets are going to do worse than people think, and that's going to be the reverse of what we've seen for quite a few years now. So that would be my prediction.

[Ed]

Aswath Demodoran is the Kirchner Family Chair in Finance Education and Professor of Finance at NYU Stern School of Business, where he teaches corporate finance and valuation. You can also read his research on his blog, Musings on Markets. Professor Demodorin, always appreciate your time. Thank you.

[Aswath Damodaran]

Thank you, Ed.

[Scott Galloway]

Thanks, Aswath.

[Aswath Damodaran]

Thank you, Scott.

[Scott Galloway]

Ed, what do you think?

[Ed]

I'm always blown away by that guy. God, there was a lot in there. I think that the catastrophic risk that he brought up at the very beginning of the show is extremely, I don't know, significant, concerning, but I do think that it needs to be taken with a grain of salt. And I think if we had maybe three or four hours, I'd want to drill down exactly what of his genuine concerns, because a lot of the stuff that he was pointing to was just price action. And as I said, that's a signal, but it isn't everything. And I'm not saying that he's predicting the end of the world, but I think his point is that there's a lot of catastrophic risk out there that isn't being fully acknowledged. I don't know if I fully agree with that. I think that gold prices rising as much as they have is an example of that risk being acknowledged. I guess his point is that we're not quite seeing it in the stock market. It's something that we really need to drill down on. I also want to get Ray Dalio back on the podcast because as of this week, he wrote an article. He said, it's official, the World Order has broken down. And he's been talking about this and writing about this for years. The World Order is on its way to collapse. American hegemony is on its way out. That's going to mean the rise of gold. Of course, that is exactly what happened. And now his viewers, it is, is over. So there's a lot of catastrophizing out there. And to Aswath's point, it's not coming from the usual suspects. It's coming from people who are pretty rational and reasonable and who have been for a really long time. But I think that is my big question mark following that podcast that I'm going to be thinking about and digging into.

[Scott Galloway]

So I'm starting and I'm in the midst of selling down my US stocks for a variety of reasons. But he makes me feel better about it because, because it's always I, I think what makes you a great investor. It's like when you summit Everest. People celebrate and that's a big thing. They plant a flag. But what they fail to realize are immediately that fact mountaineers enters their brain and that is the majority of fatalities are on the way down. And I think what separates good from great investors is when to sell. It's very difficult. You know, it's very hard to know when to sell. And I'm when I look at the US Market right now and aswath, I think in a more measured way, I just think there's so much more downside risk baked into the US Market right now.

[Ed]

This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our research team is Dan Shalon, Isabella Kinsel, Kristen o' Donoghue and Mia Silverio. Drew Burrows is our technical director and Catherine Dillon is our executive producer. Thank you for listening to Prof. G Markets from Profg Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

[Aswath Damodaran]

You happy

[Scott Galloway]

and kind reunion

[Aswath Damodaran]

as the water.