Aswath Damodaran draws parallels between 2008, 2020, and 2025 stock market crashes; shares playbook amid tariff shock

In early April 2025, global financial markets were jolted by a sharp and unexpected escalation in trade policy. US President Donald Trump announced sweeping reciprocal tariffs targeting nearly every major trading partner, a move that went beyond the tit-for-tat approach of previous years.

These new tariffs were pegged not to policy negotiations but to trade deficits, making them largely non-negotiable and structurally permanent. The result was swift and brutal: U.S. equity markets shed $5.3 trillion in value within just two days (April 3-4), sending shockwaves across sectors and geographies.

Watching from a flight to Latin America, NYU professor and valuation expert Aswath Damodaran saw not just panic, but the anatomy of a full-blown market crisis in motion.

The crisis cycle

In his latest blog, Damodaran uses the event to map out what he calls the “crisis cycle”—a framework based on historical market meltdowns like the 2008 financial crash and the COVID-19 collapse.

He explains that every crisis begins with a shock, in this case, the unprecedented tariff announcement. This is followed by an immediate market reaction, where investors revise expectations, sell off assets, and demand higher returns to bear increased risk.

Eventually, these shocks find their way into the real economy, as consumers and businesses pull back, causing an economic slowdown or a recession, with negative effects on earnings and cash flows, at least in the near term.

In the long term, he said the trigger event can change the economic dynamics, causing a resetting of real growth and inflation expectations, which then feed back into markets.

He points to falling commodity prices and tightening corporate bond spreads as early signs of economic slowdown. Long-term, this could lead to the reshaping of global economic alliances and the rethinking of globalisation itself, with companies forced to rebuild supply chains and governments re-evaluating political partnerships.

This stage is already underway, as seen in the across-the-board declines—tech, energy, small, and large caps all suffered equally, suggesting no sector was considered safe. Next comes the economic fallout: rising costs, disrupted supply chains, and weakened consumer confidence threaten to slow growth and increase unemployment.

Damodaran emphasises that this crisis, like all before it, will take a unique shape. Yet the arc—from financial panic to real economic stress—remains a familiar path.

When uncertainty rises, so does the ERP

Damodaran emphasises that in times of crisis, one of the clearest reflections of investor fear is the change in the equity risk premium (ERP)—the extra return investors demand for holding equities over risk-free assets.

He explains that investors demand higher returns during a crisis, marking down asset prices in response to the increased uncertainty they face. This adjustment is visible in the rising ERP, which serves as a real-time barometer of market sentiment.

Tracking ERP through crises: 2008, 2020, and now

He references past crises to show how ERP behaves during turmoil. In the 2008 financial crisis, ERP rose from about 4% to nearly 8%, ending the year at 6.43%, and did not return to pre-crisis levels for nearly 15 years.

In the COVID-19 crisis of 2020, ERP increased from 4.4% to 7.75% within a few weeks but then returned to pre-crisis levels by September 2020, aided by government intervention. These examples highlight how ERP reflects investor uncertainty and how long it can take to stabilise, depending on the nature of the crisis.

Following the US administration’s tariff announcement in April 2025, Damodaran notes that the ERP jumped from 4.57% to 5.08% in just two days, reflecting a rapid reassessment of risk across the market. He also mentions that corporate bond spreads widened, indicating stress in the credit markets as well.

"The implied equity risk premium has risen from 4.57% on April 2 to 5.08% by the close of trading on Friday. The road ahead of us is long, but I plan to continue to compute these implied equity risk premiums every day for as long as I believe we are in crisis mode, and I will keep these updated numbers on my webpage. As stocks have been revalued with higher prices of risk, that same uncertainty is playing out in the corporate bond market, where corporate default spreads widened on Thursday (April 3) and Friday (April 4)," he underscored.

As with the equity risk premiums, the price of risk in the bond market had already risen between the start of 2025 and March 28, 2025, but they surged last week, with the lowest ratings showing the biggest surges. With treasury rates, equity risk premiums, and default spreads all on the move, it may be time for companies and investors to reassess their costs of equity and capital.

Damodaran’s personal playbook

Damodaran notes that every market crisis brings out three groups: the doomsayers, the knee-jerk contrarians, and the indecisives—each with its flaws. He argues there’s no single correct response to a crisis; actions must align with one’s cash needs, time horizon, macro views, and investment philosophy.

His approach includes tracking daily equity risk premiums, revaluing companies in his portfolio, starting with big tech, and identifying great businesses that become undervalued during panic selling. He sets buy limits for such stocks, citing BYD and Mercado Libre as examples.

Damodaran avoids obsessing over market moves and instead focuses on life’s everyday moments. He concludes by urging investors to act in ways that help them sleep peacefully at night, even amid volatility.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.