The 'Dean of Valuation' warns inflation and recession risks remain - and stocks may disappoint bulls in the second half

• Aswath Damodaran warned of sticky inflation, recession risks, and a muted second half for stocks.
• The "Dean of Valuation" said curbing price growth to 2% will be tough, and the economy may falter.
• Stocks appear fairly valued after their stellar first-half rally, limiting further upside, he said.

Conquering inflation won't be easy, a US recession could still strike, and stocks could disappoint bulls in the second half, Aswath Damodaran says.

The finance professor at NYU Stern, whose nickname is the "Dean of Valuation," shared his outlook for markets and the economy in a mid-year assessment published on Monday. He cautioned that even though inflation has slowed from a 40-year high of 9.1% to only 3% in June, it still remains above the Federal Reserve's 2% target.

"That last stretch getting inflation down from 3% to below 2% will be trench warfare, and we will be exposed to macro shocks (from energy prices or regional unrest) that can create inflationary shocks," Damodaran said.

He also poured cold water on hopes that now inflation is fading, the Federal Reserve will cut interest rates and the economy will escape a downturn. The US central bank hiked its benchmark rate from almost zero to north of 5% over the last 12 months in order to curb price growth.

"There are signs that the economy is cooling and it is again entirely possible that this turns into a slow-motion recession, as real estate (especially commercial) succumbs to higher interest rates and consumers start retrenching," Damodaran said.

The finance guru described hopes that rates will drop to 2% or lower as a "pipe dream" if inflation doesn't fall below 3%. He also issued a muted outlook for stocks in the second half.

"It is unlikely that the market will repeat its success in the second half of 2023," he said. "After the run up in stock prices in the first six months, stocks look fairly valued," he added, citing consensus earnings and cash flows.

Damodaran wrapped up his cautious outlook this way: "The economy may still go into a recession, analysts may be overestimating earnings, and inflation may make a comeback (pushing up long term rates)."