Aswath Damodaran on 2025 Market Crash: Lessons from 2008 and 2020 and a Strategy for Today

Renowned NYU finance professor and valuation expert Aswath Damodaran has been digging into the patterns behind major market crashes, and he's seeing some déjà vu. Themes common to the three global disturbances keep re-emerging: overpriced assets, unpleasant surprises, and lax investor sentiment. From the housing meltdown of 2008 to the COVID disorder of 2020 and now the abrupt downturns being observed across the world due to tariff implementations in 2025, these common themes keep on resurfacing.

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Flashbacks to 2008 and 2020

The housing bubble burst and the credit markets froze in 2008; 2020 came along and a global pandemic swept the rug from right under the economy. Different circumstances, no doubt, but both instances involved sudden outside forces and inflated valuations that could not hold out against market assault.

2025’s Crash: Tariffs Take Center Stage

The issue this time is not with any kind of virus or bad loans; it is on tariffs. Early in April, former President Trump threw the markets into shock with broad tariffs that raised fears of imminent global recession. The reaction was swift and fierce: More than $6 trillion in market value were wiped off the world within two days. China did not stand by for long and retaliated with tariffs on U.S. goods.

The kicker? Just a month earlier, the economy looked solid, jobs were growing, wages were up, and unemployment was low. But now, JPMorgan’s betting there’s a 60% chance of a global recession. They’re expecting the U.S. economy to shrink slightly in late 2025, and for unemployment to climb to 5.3% by 2026.

On top of that, the average American household could see an extra $3,800 in yearly costs thanks to these tariffs. Business investment is slowing, and consumer spending might be next. Congress is laser-focused on cutting the deficit, and the Fed doesn’t have much wiggle room thanks to lingering inflation. Things are getting rocky, fast.

Damodaran’s Take: More Than Just Numbers

In a blog published earlier in the year, Damodaran expressed his views regarding certain markets like India, which are looking very pricey. Stocks in India were being deemed overvalued, trading at P/E multiple valuations exceeding 31, rather way above global averages. 

But Damodaran's concerns are not limited to mere numbers. He has his eye on the intertwined phenomena of growing nationalism and trade wars, reshaping the contours of global markets. Trade wars (and tariffs) will make the world collectively less well off, but like all global shocks, they will create winners and losers.

So What Should Investors Do? Damodaran’s 5 Tips

• Take valuations seriously: Don't run after hot markets. If prices grow faster than profits, they send red flags. Be circumspect; approach the numbers with scrutiny.
• Diversify, diversify, diversify: Geopolitical shocks tend to decimate unevenly. Spread your investments worldwide among different areas and sectors to give some cushion if one area does take a hit.
• Back to basics: Companies with a solid cash flow, strong balance sheets, and steady business models are most likely to withstand slowdown. The focus must be on fundamentals.
• Watch for the policy headlines: Tariffs and trade policy can turn every market upside down overnight. Stay nimble and keep yourself abreast so you can pivot in a heartbeat if necessary. 
• Think long-term: Short-term gyrations give one the jitters, but history has shown time and again that markets recover. Never forget that a bit of patience and perspective will go a long way toward one's long-term success.
   

The Bottom Line

It seems like the cycle follows a familiar pattern whenever there is a market crash-whether housing in 2008, a virus in 2020, or tariffs in 2025. Damodaran mentioned in his blog, "Be careful, diversify, and focus on companies with survival skills." The markets are unpredictable, but you shouldn't be if you have a plan.