---
title: "Why is the Stock Market Only Down 15%?"
description: "Discover why the S\u0026P 500 is only down 15% through data-driven dividend analysis. Key metrics reveal market growth expectations dropped from 5.8% to 4%."
categories: ["data analysis","financials"]
keywords: ["stock market analysis","dividend growth rate","S\u0026P 500","discount dividend model","venture capital","financial data analysis","economic turmoil","market valuation"]
ai_summary: "Explains why the S\u0026P 500 is only down 15% using a discount dividend model, considering future dividends and growth rates."
date: 2020-05-11
lastmod: 2026-07-31
canonical_url: https://www.tomtunguz.com/why-is-the-stock-market-down-only-15-percent/
author: "Tomasz Tunguz"
---

Why is the S&P index "only" down about 15%? Given all the economic turmoil, shouldn't the index collapse? I was wondering this so I went to the source of all truth on the internet, Reddit. As I read the [investing subreddit](https://www.reddit.com/r/investing/), I stumbled onto an explanation written by VPride1995 using a simple mental model that illuminated one potential answer. 

The [discount dividend model](https://en.m.wikipedia.org/wiki/Dividend_discount_model) states that the value of a stock is the discounted cash flow of all future dividends. Companies pay a dividend to shareholders from profits. Public companies dividend out 30-40% of earnings on average. 

The model says that the value of a stock is equal to next year's dividends divided by (the cost of capital minus the dividend growth rate). Written as an equation 

`Value = (Dividend_this_year x (1+dividend_growth_rate)) / (risk_free_rate + equity_risk_premium - dividend_growth_rate)`

![image](https://res.cloudinary.com/dzawgnnlr/image/upload/v1589253340/DDM.png)

We can treat the S&P500 as one stock, even though it's a basket of 500. We can plug in last year's numbers in the [table linked here](https://docs.google.com/spreadsheets/d/1Ae0ZtKc6b4zqoBv4i-ooCjgwoiXHfQM_-UfPgH1Tk6A/edit#gid=0) to get an approximation for the value of the S&P 500 on Dec 31, 2019, of 3224, and this implies an S&P dividend growth rate of 5.8%. The S&P500 levels in April suggest that the market believes dividends will grow at 4.0%, down 30%. 

But a lot has happened since then. If we assume two years of zero dividends, then dividends resume at their 2019 levels in 2022, then the value of the S&P500 is modeled to be 2777, which is just about a 15% decline. So you could explain the 15% decline by saying: the market has priced in two years of no dividends. 

Alternatively and more pessimistically, if you assume the dividend growth rate falls from 5.8% to 4% after two years at zero dividends, then you should expect the index to fall 25% in value. Even in the extreme scenarios of no profits/dividends for two years and a 30% reduction in growth rate two years hence, the index should fall about 25%. 

Like all mental models, this one is a gross simplification. It doesn't consider the equity value or the appreciation of the S&P 500 during that time. And in reality, the stock market is a far more complex beast. There are major forces shaping the markets: the rise of passive investing, variances in trading volumes (which increase volatility), and vacillating dollar investment flows entering and exiting the US stock markets. 

The DDM is not a unifying theory of economics, just a toy gyroscope to understand one principle. The model helped me understand why my intuition for stock market drops may not align well with how I ought to be thinking about them. Just because revenues fall or growth rates fall or profits fall a certain amount doesn't mean the market should move in tandem with them.