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Damodaran Equity Premium Estimates and Future Stock Market Returns

Posted in Equity Premium

A subscriber asked whether the annual equity risk premium estimates of Aswath Damodaran predict stock market returns one year ahead. The cited source offers two 58-year series of annual estimates of the U.S. equity risk premium implied by an S&P 500:

  1.  Dividend Discount Model (DDM).
  2.  Free Cash Flow to Equity (FCFE).

We calculate S&P 500 Index total annual returns from this source as capital gains plus dividends and then relate this total return series to each of these two implied equity risk premium series. Using the specified data during 1960 through 2017, we find that:

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