These days, politics are everywhere. They’re seeping into your social media feeds, flaring up in your group chats, and – increasingly – lurking in your portfolio. While you’re busy tracking economic data and company earnings, markets are obsessively watching election polls and tariff announcements. See, political drama isn’t some sideshow now – it’s a central plotline that helps determine how companies are valued and how stocks move.
That’s something Aswath Damodaran – a top finance professor at New York University’s Stern School of Business – thinks a lot about. He’s long made the case that valuation is more than just a spreadsheet exercise: it’s about weaving together numbers and story. And the narrative now includes a huge political component. So if you’re not paying attention to that, you’re missing things.
Why politics are now so wrapped up in valuations
I love spreadsheets – clean forecasts, tidy numbers. But I’ve come to accept that they can’t give me the whole picture. Valuation is ultimately about storytelling with numbers. You start with a business narrative – what the company does, how it will grow, what risks it faces – and then convert that into inputs like revenue growth, profit margins, and risk premiums.
In the past, politics would be just background noise to all this. Governments taxed and regulated businesses, yeah, but if you were valuing a US or UK company, you could usually treat political developments as context, rather than a driver. Political turbulence was something more for emerging market companies to deal with.
Today, political exposure is a core input. Valuing a company without factoring it in is like pricing your home insurance without considering the weather. Take Tesla. Sure, its valuation is tied to EV sales. But Elon Musk’s political persona, his social media commentary, and perceived alliances in Washington and abroad now move the needle too. A vigorous backlash by consumers in Europe and the United States, plus slowing demand in other politically sensitive regions – these things are feeding into how Tesla’s shares are priced.
Chinese EV giant BYD is another case. It’s outpacing Tesla in several markets. But Damodaran hesitates to invest, not because of the numbers, but because the Chinese government is deeply entwined in its story. That political overlay can make even strong fundamentals feel opaque.
This goes beyond autos. From green energy and defense to cloud infrastructure and semiconductors, politics are shaping business prospects in real time. So it makes sense to evolve how you build your models and how you think about risk.
The price of political risk
One of Damodaran’s key tools is the equity risk premium (ERP) – that’s the added return that investors demand for holding stocks instead of safe-haven government bonds. When investors feel confident, the premium shrinks. When fear rises, it expands.
The market risk premium represents the added return investors expect above the risk-free rate to compensate for accepting potential market volatility. The term “equity risk premium” is often used interchangeably with “market risk premium”. Technically, the equity risk premium refers to the expected return of stocks above the risk-free rate, and the market risk premium is a specific case of this – typically the premium of a broad market index like the S&P 500 over long-term government bonds. Source: Corporate Finance Institute.
The early weeks of President Trump’s second term of office saw a sharp increase in this premium – from 4.35% (at the start of March) to 4.68% (in the first two weeks of March). That jump didn’t come from worsening earnings or slowing economic growth. It came from rising uncertainty about policy: tariffs, trade wars, government spending cuts, and regulatory shake-ups.
Markets are, as you probably know, forward-looking. And what they saw on the horizon wasn’t a recession but a regime change – with all the unknowns that come with it. And that elevated premium reflected a market trying to price in some unpredictable outcomes.
Now, this is not theoretical. Tariffs can raise costs overnight. The rollback of a subsidy can sink an entire sector. Just look at how green energy stocks reacted when government support was scrutinized. Even defense firms – long considered safe bets – can face massive valuation swings based on a single budget speech.
Put simply, when political uncertainty becomes the dominant threat, the risk premium becomes a political barometer. And that affects everything from index levels to bond yields to money flows.
How to value stocks in a politicized world
Damodaran breaks valuation into four key drivers, each of which is now politically sensitive:
1. Revenue growth. Take the S&P 500. In 2023, about 28% of total revenues came from foreign markets. But among tech companies, that figure was almost 60%. Companies like Apple – with deep supply chain roots and big customer bases overseas – now face geopolitical risks that didn’t exist twenty years ago. Because of that, a trade dispute, export ban, or data privacy law in another country can instantly drag down top-line growth.
So here’s what you can do. Segment a company’s revenue not just by product or region, but also by political exposure. If a business earns 40% of its income in China, you’ll want to weigh how US-China relations or export controls could jeopardize that stream. Consider regulatory headlines, tariff exposure, and market access as part of your revenue forecast, too. And incorporate scenario analysis – a baseline case and a risk-adjusted case where a major international market becomes inaccessible.
2. Margins. Few companies are an island: even those that sell their goods domestically may be importing raw materials or components. And a sudden tariff or import restriction could widen their cost bases overnight – and so could rising wage pressures from re-shoring production and union resurgence. Look, margins aren’t just about efficiency anymore: they’re also about regulatory exposure and political sentiment.
So here’s what you can do. Go beyond historical margin trends. Ask where production is located and how susceptible it is to cost shocks from tariffs, wage mandates, or supply chain breakdowns. Adjust your margin forecasts of re-shoring, minimum wage laws, or compliance costs are on the horizon. And use things like company 10-K regulatory filings and investor calls to uncover where the vulnerabilities lie.
3. Reinvestment. When companies are forced to move supply chains or chase politically safe jurisdictions, they often have to reinvest – and heavily. Damodaran points out that relocating a semiconductor fabrication plant or an auto assembly plant would be a massive capital expense (capex) – reducing capital efficiency and slowing compounding returns. The friction is real.
So here’s what you can do. Account for new capex not as a pure growth signal but as a response to geopolitical pressure. If a firm opens a new factory in Texas to offset risk in Asia, the return on that investment may be lower than past projects. Reinvestment efficiency – traditionally calculated as revenue per dollar of capital – must now be adjusted for political motivations. And higher reinvestment might not yield proportionally higher growth.
4. Risk of failure. For decades, big US companies operated under the assumption of an implicit safety net. But that net may now be unevenly applied. Damodaran notes that under the current political climate, rescue decisions are as likely to be ideological as economic. A struggling green energy firm might be allowed to fail if it no longer fits the policy narrative, for example. But more broadly, political alignment could become a key component of bankruptcy risk.
So here’s what you can do: Shift from a financial-only perspective to one that incorporates regulatory fragility. Identify how dependent a company is on government contracts, tax credits, or soft guarantees. If, say, a defense firm relies on a specific annual allocation from Congress, keep in mind that political gridlock or public sentiment could become a risk multiplier. Track CEO political engagement, pending investigations, or shifting regulations as leading indicators.
Valuation requires more than just plugging numbers into a model. It demands a full read of the context in which a business operates – its alliances, exposures, and adaptability. The same spreadsheet can yield wildly different answers once the political story changes.
How to spot politically sensitive stocks
This new reality doesn’t mean you have to stop investing. It just means you need to sharpen your lens. Certain traits can help you identify companies with high political exposure:
- High dependence on foreign markets for revenue or supply
- Heavy reliance on government contracts or subsidies
- Operation in sectors under active policy focus – defense, healthcare, energy, tech
- Leadership with strong political affiliations or a controversial public presence
Defense contractors, for instance, may thrive under one administration but face scrutiny under another. Green energy startups can see valuations balloon or collapse depending on a single policy shift. And tech giants may find themselves facing regulation in one region and tax incentives in another.
Investors should treat political regimes as part of their diversification strategy. Consider spreading exposure across sectors with different political sensitivities and across geographies with divergent regulatory paths. This isn’t just smart investing. In an era of heightened policy risk, it’s survival.
