---
id: "framework-valuation-equation"
type: "framework"
source_timestamps: ["Reel 27", "Reel 37"]
tags: ["valuation", "market-mechanics"]
related: ["concept-cagr-benchmark-cb", "concept-cashflow-vs-profit"]
---
# The 3 Forces of Stock Valuation

## Purpose

A mental model for understanding **exactly what moves a stock's price**, separating fundamental financial reality from market sentiment and structural noise.

## The Three Forces

1. **Force 1 — Earnings.** Actual net income and cashflow generated by the business. The fundamental anchor. See [[concept-cashflow-vs-profit]].
2. **Force 2 — Growth.** The P/E multiple, representing how many years of future growth the market is pricing in. Operationalized via the CAGR Benchmark — see [[concept-cagr-benchmark-cb]].
3. **Force 3 — Supply & Demand / News.** Macro events, share dilution, share buybacks, ETF inclusion, and short interest that artificially move price independent of fundamentals.

## How to Use

When analyzing any price move, decompose it across the three forces:

- Did **earnings** change? (Look at quarterly results, guidance.)
- Did the **growth narrative** shift? (Multiple expansion or contraction.)
- Was it **flow / structural**? (Index rebalance, dilution, buyback, geopolitical news.)

If you can identify *which* force drove a move, you can decide whether to act, hold, or fade.

## Strategic Implication

Value investors should weight Force 1 heavily, treat Force 2 with the discipline of [[concept-cagr-benchmark-cb]], and use Force 3 dislocations as entry opportunities (the [[framework-capital-rotation]] mechanism).