For junior investment bankers, building discounted cash flow (DCF) models is a rite of passage. The 10-year Treasury yield, used as the "risk-free" rate in these spreadsheets, recently hit 5 per cent for only the second time since 2007. This rate anchors the cost of capital; when it rises, future cash flows are discounted more heavily, theoretically lowering company valuations. Yet the S&P 500 is down only about 1 per cent over the past month and up for the year, defying the model logic. The Federal Reserve's first rate hike in three years adds complexity. Goldman Sachs estimates the S&P 500 historically falls 2 percentage points at the start of a tightening cycle, and notes three-quarters of the index's present value derives from cash flows a decade or more out.

The equity risk premium (ERP) — the extra return investors demand for stocks over risk-free debt — is also shifting. NYU professor Aswath Damodaran pegged it at just above 6 per cent in late August, up nearly a percentage point from a year prior. Most bankers use a static 5 per cent ERP, but Damodaran's data shows a wide 4.75 per cent to 7.70 per cent range between 2012 and September 2025, capable of sharply swinging valuations. Corporate debt costs remain richly priced. Investors appear unworried about recession or earnings pressure, leaving few signs that the cost of capital has truly risen — a relief for dealmakers and IPO candidates marketing high valuations. However, trainees may need to flag that their Excel outputs and market behavior are sharply at odds.