US Equities in Focus: Aswath Damodaran

US Equities in 2024: Sector Shifts, Market Trends, and the Death of the Small-Cap Premium

Aswath Damodaran’s latest analysis of US equities in 2024 provides crucial insights into sector performance, market capitalization dynamics, and the evolving role of traditional investment principles. While 2024 was a strong year for equities, the returns were concentrated in large-cap stocks, with momentum and passive investing shaping the landscape.

Listen to a conversational review of this article (Aswath’s video is below):

Sectors: Big Tech Leads the Charge

US equities experienced a highly uneven rally in 2024, with certain sectors dominating while others stagnated. Technology, communication services, consumer discretionary, and financials each posted gains exceeding 20%, while healthcare, materials, and real estate barely moved.

The technology sector alone added an astonishing $4.63 trillion in market capitalization in 2024, reinforcing its central role in modern markets. Over the last decade, tech has accumulated $13.6 trillion in value, with companies like Nvidia and Tesla leading their respective industries in growth. However, traditional industrial sectors such as steel, chemicals, and rubber continued to struggle.

One of the most surprising developments was the underperformance of green energy stocks, which had previously benefited from investor enthusiasm for ESG and sustainability. Damodaran suggests that the so-called “virtue trade” has lost momentum as investors shift back to fundamentals.

The Small-Cap Premium is Dead

For decades, financial theory suggested that small-cap stocks should outperform large caps on a risk-adjusted basis. However, Damodaran’s analysis challenges this assumption, showing that the small-cap premium has been absent for over 50 years.

In 2024, the distribution of market capitalization gains was heavily skewed toward the largest firms. The top 1% of publicly traded companies—approximately 60 stocks—accounted for 74% of the total increase in market cap. Even more striking, the so-called “Mag Seven” (Apple, Amazon, Meta, Alphabet, Microsoft, Nvidia, and Tesla) generated $5.6 trillion in market value, accounting for nearly the entire market’s gain for the year.

This concentration of returns among a few dominant companies reflects structural changes in the market, where passive investing and winner-take-all industry dynamics favor large, established firms over smaller challengers.

The Value Premium: Another Relic of the Past?

Alongside the small-cap premium, the traditional value premium—where low price-to-book stocks outperform high price-to-book stocks—has also declined. In 2024, the best-performing stocks were those with the highest price-to-book ratios, contradicting the long-held belief that undervalued companies deliver superior returns over time.

Damodaran attributes this shift to three major factors:

• Price-to-book is outdated: The rise of intangible assets has made book value an increasingly poor indicator of a company’s true worth.
• Momentum dominates: Stocks that perform well continue to attract capital, pushing prices higher regardless of fundamental valuation.
• Structural market changes: The 20th-century model of mean reversion—where underpriced stocks eventually recover—has weakened due to globalization and rapid technological shifts.

Momentum: The New Market Driver

Momentum remains the dominant force in equity markets. Stocks that outperformed in 2023 continued to generate strong returns in 2024, reinforcing a trend-driven market structure. Passive investing, which now accounts for 50% of all invested funds, further strengthens this effect by directing capital into already-successful stocks.

However, Damodaran warns that momentum is a double-edged sword. While it has driven remarkable gains in recent years, it is inherently unstable—when the trend reverses, large-cap stocks could suffer disproportionately.

Key Lessons for Investors and Traders

The market dynamics of 2024 carry important implications for investors, traders, and regulators:

For investors: Traditional active investing strategies relying on historical valuation metrics are losing ground. Fund managers who screen for low PE ratios or high dividend yields are increasingly underperforming index funds.

For traders: Momentum trading has been highly effective, but it carries risks. A sudden reversal could wipe out gains, making it crucial to detect early signs of trend shifts.

For regulators: The increasing role of momentum and passive investing may lead to more market volatility. However, intervention may prove futile, as speculative behavior is deeply ingrained in modern markets.

The Future of Market Strategy

Damodaran’s analysis suggests that betting on the resurgence of small-cap or value stocks is a losing strategy. The market is evolving, and investors must adapt. While momentum currently dominates, no trend lasts forever. The key question for 2025 is whether these forces will continue or if a reversal is imminent.

Aswath Damodaran: A Brief Biography

Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University (NYU). He is widely recognized as one of the leading experts in valuation, corporate finance, and investment strategies. Often referred to as the “Dean of Valuation,” he has written numerous books and research papers on equity valuation, risk assessment, and market dynamics.

Damodaran is particularly known for his in-depth analyses of financial markets and his accessible approach to teaching complex financial concepts. His work focuses on fundamental valuation techniques, including discounted cash flow (DCF) analysis, risk and return assessment, and behavioral finance influences on stock prices.

Beyond academia, he actively shares insights through his blog, books, and online courses, making valuation principles widely accessible to investors, analysts, and finance professionals. His annual market data updates are highly regarded in the finance community, providing a deep dive into trends shaping global equity markets.

With decades of experience, Damodaran continues to influence investment thinking, bridging the gap between academic theory and practical application in valuation and financial decision-making.

Aswath’s full, original article is here. He can be followed on X here.