Interview with The Buy-Side: Themes in Valuation for 2025 for Public Companies

As we head into 2025 there are a complex array of factors reshaping how the market values public companies. Below, we walk through a series of questions to explore how these influences—from macroeconomic forces and geopolitics to technology adoption, human capital strategies, and sustainability pressures—are reflected in valuation models.

1. Interviewer: How is the fundamental concept of valuation evolving as we approach 2025?

Valuation is continuing to transition to an approach that is more scenario-based, dynamic, and integrated with macroeconomic forecasts. Historically, valuations centered on applying constant discount rates to relatively predictable cash flows. Today, we’re no longer simply projecting historical growth and applying a stable cost of capital. Instead, we adjust for a variety of regimes—economic, political, and technological. For example, we now often run multiple discounted cash flow (DCF) models, each with different macro assumptions (interest rates at 4% vs. 6%, inflation at 2% vs. 4%, GDP growth at 1.5% vs. 3.0%) and weight the outcomes by their probabilities. This approach replaces a single “fair value” with a probability-weighted valuation range, acknowledging that future states of the world are not only uncertain but structurally shifting.

2. Interviewer: How do emerging geopolitical tensions and market fragmentation factor into valuations?

We’re now embedding a geopolitical risk premium into equity risk premiums and discount rates. For instance, if a company’s cash flows are highly dependent on supply chains anchored in regions with potential trade conflicts or sanctions risk, we might add 50–150 basis points to the equity risk premium or model scenario-specific margin haircuts of 200–300 basis points in stressed geopolitical conditions. We also look at revenue concentration maps: a business with 40% of sales from a politically volatile region might see its valuation scenario weights skewed more heavily toward downside outcomes. By quantifying these external pressures—such as applying a 5% probability of a major supply disruption event, resulting in a $200 million EBITDA impact—we make geopolitical risks more explicit rather than handling them implicitly.

3. Interviewer: With central banks adjusting their policies, how do higher interest rates and persistent inflation influence valuation models?

When the risk-free rate rises from near-zero levels to something like 4% or 5%, the entire capital stack re-prices. A typical large-cap stock that once carried a 6%–7% cost of equity might now face 8%–9% or more. That increase lowers the present value of future cash flows. For inflation, we feed in different cost structures: if input costs rise at 3%–4% annually rather than 1%–2%, we might reduce long-term margin assumptions by 100–200 basis points or require evidence of pricing power before assigning growth multiples. We also integrate inflation-linked discount rates, for instance using a TIPS yield as a baseline and then building an equity premium on top, ensuring our models reflect real rather than nominal returns.

4. Interviewer: ESG and sustainability factors have become more prominent. Are they materially affecting valuations?

Absolutely. We now factor ESG elements not as vague “intangibles” but as quantifiable risk and return drivers. For instance, if a company operates in a sector subject to a future carbon tax, we model a scenario where carbon pricing starts at $50 per ton and escalates at 5% annually, cutting into EBITDA by $50 million per year by year five. On the other side, companies with strong sustainability credentials might enjoy lower funding costs (perhaps a green bond at 3.5% rather than 4.0%), or we assign them a tighter discount rate reflecting perceived lower risk. Evidence suggests firms with top-quartile ESG scores can trade at P/E multiples 5%–10% higher than median peers. So, ESG moves from a narrative checkbox to a factor embedded in both cash flow assumptions and discount rates.

5. Interviewer: Technology, especially AI, is being touted as transformative. How do we reflect this in valuations?

We start by adjusting revenue growth and operating margin trajectories to reflect AI-driven efficiency gains. For example, if we believe effective AI deployment can reduce SG&A costs by 200–300 basis points over a five-year period, that directly boosts net present value. On the growth side, AI may enable hyper-personalization of products, potentially increasing annual revenue growth by 1–2 percentage points in our base-case scenario. We also consider intangible capital—algorithms, proprietary data sets, and AI-driven IP—as a form of strategic asset that lowers long-term competitive pressures, potentially justifying a terminal value multiple that’s 0.5x–1.0x higher on EBITDA. We run scenario analyses: a failure to adopt AI might mean the company lags peers, warranting a 10% downside to the base case, while successful integration could add 15%–20% to the valuation.

6. Interviewer: Supply chain resilience has become critical. How does this factor into valuation?

We quantify supply chain resilience as a form of operational flexibility that reduces downside volatility. For instance, a company that has diversified its suppliers across three continents and maintains strategic inventory levels might see its downside operating income variability cut by half. This can lower the implied equity risk premium. Instead of, say, using an 8% cost of equity, we might use 7.5%. Additionally, if there’s a historical precedent that supply shocks have shaved 20%–30% off equity prices temporarily, a resilient supply chain can reduce that drawdown risk. Over a long-term DCF, reducing the probability-weighted downside can lift the probability-weighted valuation by several percentage points.

7. Interviewer: Intangible assets and brand equity continue to rise in importance. How do you account for these factors quantitatively?

For brand value, we sometimes use customer churn data, net promoter scores, and price elasticity metrics to gauge the incremental cash flows attributable to brand strength. For instance, if data suggests a strong brand adds 1% incremental pricing power and a 10% reduction in churn, we can translate that into incremental cash flow of, say, $50 million annually. Capitalizing this benefit at an 8% discount rate might add over $600 million to equity value. Similarly, proprietary tech or networks can be modeled as lower customer acquisition costs or higher long-term retention, thus boosting lifetime value per customer—again, directly translating into higher discounted free cash flows.

8. Interviewer: How has human capital strategy entered the valuation equation?

Skilled labor and innovation capacity have become crucial. We look at metrics like R&D efficiency (R&D expense to new product revenue), training investments per employee, and voluntary turnover rates. A company with a turnover rate half that of its peers, for example, may save $20–30 million annually on recruiting and onboarding costs, which, when capitalized, can add several hundred million to its valuation. On top of that, a workforce adept at adopting new technologies can accelerate revenue growth or margin improvement scenarios, enhancing not just the magnitude but the stability of future free cash flows.

9. Interviewer: Regulatory risk seems to be intensifying. How can that be quantified in valuations?

We incorporate a probability-weighted penalty or cost scenario. For a company exposed to antitrust scrutiny, we might assign a 20% chance of a regulatory action that reduces EBITDA by 10% for three years. This yields a weighted outcome that trims a percentage point or two off the valuation. Alternatively, if privacy regulations threaten data-driven monetization, we might reduce long-term growth rates by 50 basis points in half our scenarios. Over a 10-year horizon, these small adjustments compound. To reflect heightened regulatory unpredictability, we may also bump the equity risk premium by 25–50 basis points, acknowledging that investors will demand a higher return for bearing this additional uncertainty.

10. Interviewer: Data analytics is a key theme. How do enhanced data capabilities affect valuation precision?

Better data improves scenario calibration. Instead of a rough guess, we might know precisely that supply disruptions historically hit EBITDA by $30 million with a standard deviation of $10 million. We then model a distribution of outcomes and estimate a value-at-risk measure—say a 5% worst-case valuation drawdown under a 1-in-20 scenario. This not only refines the expected value calculation but can influence portfolio weighting decisions. Enhanced data also helps in real-time adjustments. If new macro data emerges, we can quickly re-run our models and update valuations within hours, maintaining a constantly informed view.

11. Interviewer: Market structure is changing with more passive flows and algorithmic trading. Does that affect fundamental valuations?

While fundamentals remain the backbone, liquidity and flow dynamics can affect short-term pricing. A stock heavily held by index funds might experience rapid price swings during rebalancing periods. We might apply a small liquidity discount—say, 2%–3%—if we expect that heightened volatility could impair the market’s ability to properly price fundamentals in the short run. Over the long term, though, we still believe fundamentals assert themselves, so these liquidity adjustments are often marginal but can matter for near-term entry or exit timing.

12. Interviewer: Corporate purpose and stakeholder trust—how do these softer elements translate to quantitative adjustments?

Trust can manifest as lower cost of capital. A company with sterling stakeholder relationships often faces fewer regulatory hurdles, lower boycott risks, and might enjoy a loyal customer base that buffers revenue in downturns. We might reduce the equity risk premium by 25 basis points to reflect this stability or add 0.5x to the terminal EBITDA multiple due to lower perceived long-term risk. Over a 10-year DCF, even such a modest adjustment can add hundreds of millions in present value, effectively rewarding companies that invest in stakeholder alignment.

13. Interviewer: Climate change is a long-term factor. How do you incorporate it into near-term valuations?

We run climate scenarios over different time horizons. For instance, if a company faces a 20% probability of a carbon tax regime within five years that reduces annual EBITDA by $40 million, that’s $8 million in expected annual cost. Capitalizing that at an 8% discount rate implies a $100 million valuation hit today. Similarly, if physical climate risks might curtail operations 1% of the time, we reduce revenues or increase costs proportionally in our scenario analyses. The results inform both a base-case and a risk-adjusted value, ensuring climate isn’t a vague narrative but a quantifiable input.

14. Interviewer: How about political or social unrest impacting consumer sentiment and operations?

We turn qualitative forecasts into numeric probabilities and severity estimates. Suppose there’s a 10% chance that unrest in a key market reduces sales by 5% for two years. That equates to a direct hit to cash flows—say $50 million per year—that we discount back at the cost of equity. Even if it’s a low-probability event, it can still shave a few percentage points off the expected valuation. We treat these as tail risks and can also model the volatility they add. For example, if the volatility of cash flow estimates rises, we may adjust the discount rate or value-at-risk metrics accordingly.

15. Interviewer: Considering all these factors—macroeconomic shifts, ESG, geopolitics, tech, human capital—are traditional multiples still relevant?

Traditional multiples serve as a quick sanity check—a shorthand. But given the complexity of 2025’s environment, we rely more on integrated DCF and scenario-based models. Multiples remain useful for cross-checking relative valuation but must be interpreted in context. If we see a peer set trading at a median of 12x EBITDA and our scenario-based DCF yields a valuation implying 10x, we ask why. Is the market discounting regulatory risks we didn’t fully model, or are we more optimistic on margin resilience due to AI adoption? Traditional multiples now prompt more questions than they provide answers—an input, not an endpoint.

16. Interviewer: With complexity rising, how do you prevent “analysis paralysis” and overfitting models?

The key is to pick a handful of critical variables that truly move the needle—interest rates, top-line growth drivers, input cost inflation, regulatory scenarios—and focus on those. Instead of adding complexity for complexity’s sake, we practice strategic simplification. We might identify three main scenarios: optimistic, base, and pessimistic, each with carefully chosen inputs. The final valuation might be a probability-weighted average of these. This approach balances nuance with practicality, ensuring we remain adaptable without drowning in detail.

17. Interviewer: Is investor education a factor here?

Transparent communication is crucial. We present our scenario assumptions, show what drives the variance in outcomes, and provide sensitivity tables. By demonstrating how a 100-basis-point increase in the discount rate or a 50-basis-point drop in long-term EBITDA margin affects valuation, we help stakeholders understand the model’s mechanics. This builds confidence and reduces the mystery around complex models.

18. Interviewer: Will regulatory or accounting standard-setters provide more clarity that aids in valuation?

While we can’t rely on external bodies to solve complexity, standardized disclosures—especially around ESG metrics, intangible investments, and corporate governance—could reduce uncertainty. Transparent data on carbon emissions, R&D outcomes, or workforce turnover allows us to plug more accurate figures into our models. Over time, more uniform disclosures mean less guesswork and tighter probability distributions, leading to valuations that better reflect real economic values.

19. Interviewer: As these new factors become standard inputs, how do you see valuation evolving over the next decade?

The process will likely continue shifting towards continuous re-assessment. We’ll incorporate real-time data, update risk-free rates and risk premiums monthly or quarterly, and re-run scenario analyses as new information surfaces. Expect more automated modeling tools, probabilistic simulations, and machine learning predictions feeding into valuation frameworks. Ultimately, valuation moves closer to a dynamic dashboard.

20. Interviewer: Any overarching advice for public companies looking at valuations in 2025?

Embrace complexity without abandoning rigor. Acknowledge that valuations are now probability distributions, not single points. Pay attention to strategic adaptability, resilience, and intangible assets. Companies that demonstrate credible action on ESG, deploy technology effectively, and manage geopolitical exposure will earn valuation premiums. Investors who build frameworks that incorporate multiple lenses—macro, regulatory, ESG, technology, human capital—and continuously update assumptions will gain a competitive edge. The ultimate goal is to translate uncertainty into a structured, quantifiable range of possible outcomes, allowing better-informed risk-reward judgments.

21. Interviewer: How might a world scenario of protracted stagflation impact valuations?

In a stagflation scenario—say 0.5% GDP growth paired with persistent 4%–5% inflation—earnings forecasts typically shrink and discount rates rise. We might model a 50–100 basis point higher cost of equity and 1–2 percentage points lower annual revenue growth compared to a base case. Over a 10-year DCF, that can easily compress valuations by 15%–25%. Stable, cash-generative companies with strong pricing power receive a relative premium, while high-growth, high-multiple firms see valuations contract sharply as long-term margins and growth appear less sustainable.

22. Interviewer: What if we consider a multipolar world where global trade splits into distinct economic blocs?

In that environment, we identify revenue streams by bloc and apply varying discount rates to each segment. For example, revenues derived from a stable bloc might keep an 8% cost of equity, while revenues from a contested bloc might be under a 9.5%–10% cost. Operational costs could rise 10%–20% if inefficiencies from tariff barriers emerge. Portfolio-level valuations become more layered: a company diversified across several blocs may achieve a stable blended valuation, while one heavily reliant on a single region faces a more volatile range of outcomes.

23. Interviewer: Consider a scenario of accelerated climate transition—how would that shift valuations?

In a world that aggressively pursues decarbonization—say a carbon tax starting at $100 per ton and strict emissions targets by 2030—carbon-intensive companies might lose 20%–30% in DCF value. Conversely, firms aligned with clean technologies could see 10%–15% upside to their base valuations due to preferential regulatory treatment, investor inflows, and lower long-term capital costs. We’d incorporate these shifts by adjusting operating costs, capex for transition investments, and long-term growth rates tied to clean tech adoption.

24. Interviewer: What if breakthrough AI technologies reduce global labor costs drastically?

If AI-driven automation cuts labor expense ratios by, say, 30% across the board within a decade, we’d revise operating margins upward significantly. A company with a 20% operating margin might see it climb to 24% or 25%. That 400–500 basis point improvement can boost DCF valuations by well over 10%–15%. We’d apply scenario probabilities—perhaps a 25% chance that AI adoption is widespread and successful—to produce a weighted expected value. Firms with heavy labor components in their cost structures stand to gain disproportionately, while businesses that rely on skilled human talent for differentiation might see less upside.

25. Interviewer: Finally, if a scenario emerges where de-globalization intensifies and localization becomes dominant, how would that influence valuations?

More localization translates into smaller addressable markets but potentially more stable supply chains. We might reduce top-line CAGR by 50–100 basis points due to market fragmentation, but also lower volatility assumptions on margins since local supply chains could be more predictable. Over time, this might compress valuations slightly—perhaps 5%–10%—relative to a global free-trade scenario, but also reduce tail risks. The net effect depends on a company’s starting position: a globally diversified business may suffer more lost growth, while a domestically oriented firm might gain a small premium for stability.