Is the market always right? Not necessarily. Here's why investors are often wrong.

In the world of investing, there is an often repeated maxim: "the market is always right"But do stock market valuations truly accurately reflect the state of the real economy and the true value of companies? In this article, we'll examine this adage in practice and consider how true it is. We'll discuss what it means from a trader's perspective and what it means from an economic perspective. We'll analyze the difference between market valuation and fundamental value. We'll provide examples of situations in which the market price of a stock significantly deviated from the actual state of a business or economy. We'll also consider the causes of these discrepancies. Finally, we'll summarize our considerations and attempt to answer the question: Is the market truly always right, or can it sometimes be wrong? And what does this mean for investors and traders?

“The market is always right” – what does this saying mean in practice?

This saying is particularly popular among stock traders. In practice, it means the belief that The current market price is the final verification of all forecasts and opinions. Regardless of what we think about a given company or market, the price of a stock (or index) at a given moment is the result of the collective consensus of all active buyers and sellers. In other words, the price at which a transaction occurs today is the "final word" on the market, and investors must accept this fact. The market is the ultimate court, where the clash of supply and demand determines the price, and there's no point in arguing with the price we see on the board. Following this maxim, we don't argue with what the market has done and treat price movement as a kind of verdict, which may sometimes seem "unfair" or irrational, but is nonetheless a fait accompli, determining our profits or losses.

Why do stock market practitioners say this? What matters to a trader is effectiveness and profit, not proving oneself right at all costs. There is even a saying:

“You can be right or you can make money.”

This means that one can be convinced of the value of a stock (e.g., believe it's worth more), but if the market values ​​it lower and the price falls, sticking to one's guns is likely to result in losses. Therefore, traders often follow the trend and price, because the market's "rightness" is revealed precisely in the price prevailing here and now. Technically, the market is always right as a measure of the consensus of supply and demand at a given moment, expressed by the price. It could be said that at a given moment, the price reflects the strength of the buyer or seller, and not necessarily rightness in the sense of objective fairness or fundamental value.

At the same time, however, the very saying “the market is always right” doesn't mean that the market price is always correct from a fundamental value perspective. Rather, it means that you shouldn't fight the market. If most people wants to sell its securities and the price goes down, the investor may think the company is great, but it's the market "sets the score" and the investor's arguments won't change the fact of the decline. In practice, this maxim teaches humility: instead of getting offended by the market, it's better to accept its indications and adjust your strategy. The stock market can be capricious, sometimes overdoing it in euphoria or panic, but in real-time, it's "price verdict" is crucial for our investments. Technical traders even say that "the trend is your friend" and try to go with the market, not against it.

From an economic or fundamental perspective, however, the question arises: does the fact that the market has priced a given asset so highly mean it is correct about its true value? Does the stock market sometimes overvalue companies or panic excessively, disconnecting valuations from economic realities? This brings us to the key issue: valuation vs. value.

Valuation vs. Value – Definitions and Differences

In finance, a distinction is often made between market price/valuation and the intrinsic (fundamental) value of an asset. Market valuation is simply the current price at which you can buy or sell, for example, a stock. In other words, it is the value that the market gives to the company at a given moment. A company's market valuation is measured by its capitalization (share price times the number of shares outstanding)—this is how much the company is "worth" from the perspective of investors at a given moment on the stock market. This valuation is constantly changing with price fluctuations. It is "objective" in that it results from actual market transactions. The market price is therefore a fact, a point of equilibrium between supply and demand.

Intrinsic value (also called fundamental or true value) is a more theoretical concept. It refers to the measurable, objective value of a business, calculated based on economic fundamentals, regardless of the current market price. Simply put, it is "how much is the company worth in the real world", taking into account its assets, ability to generate profits (current or future) and cash flows, market position, growth prospects, etc. This value is estimated using fundamental analysis methods, for example, by discounting the company's projected future profits or cash flows to its present value. This calculated value provides a benchmark: it allows us to assess whether the shares are undervalued (when the market price is lower than the intrinsic value) or overvalued (when the price is higher than the fundamentals would suggest).

It is worth adding, however, that not all elements that influence the value of a company can be precisely captured in numbers. There are qualitative factors that are difficult to quantify but which have a real impact on the future of the company.These include management competencies, organizational culture, innovation capacity, customer loyalty, brand reputation, and the potential to build a network effect. Although difficult to incorporate into a simple DCF model, it is often these "soft" characteristics that determine which company can rise above the competition and build advantages that are difficult to replicate. Therefore, in fundamental analysis, the ability to draw conclusions from qualitative aspects of the business, even if they cannot be readily reduced to an Excel formula, is just as crucial as analytical precision.

It is crucial to understand that price (market valuation) and value are not the same thing.

"Price is what you pay. Value is what you get." – this is a statement that is attributed to Warren Buffett, which reflects the meaning of these considerations very well.

By paying a specific price for shares on the stock exchange, we acquire a share in a real business, and its true value may differ from this price (both positively and negatively). In the short term, stock market prices may differ from the company's condition because they are influenced by many variables (investor emotions, market trends and narratives, speculation, media news, interest rates and inflation, etc.).

Some investors compare the market to a popularity contest—short-term popularity, but with a scale measuring long-term value. They argue that a stock's price can be too low or too high temporarily, but over time it tends to approach its fundamental value. It is precisely this difference that forms the basis of the value investing philosophy: buying stocks below their intrinsic value and patiently waiting for the market to "see" the true value and adjust the valuation.The market often overreacts, leading to excessive price declines or increases that don't reflect the underlying value of the underlying instruments. Value investors try to capitalize on these situations, buying when the market becomes excessively undervalued and selling when it becomes euphoric, driving prices higher.

Therefore, market valuation is the current price set by the stock market, a result of consensus and investor sentiment. Value (fundamental) is the estimated real value of a business based on its financial data and prospects, independent of momentary price fluctuations. However, it's worth remembering that even the estimate of this "real" value is not fully objectiveDifferent investors may assign different weights to individual value components – some are more impressed by the quality and experience of management, others by cost advantages or market growth rates. Some will consider regulatory risk, others will ignore it. As a result, Intrinsic value is a range of values ​​rather than a single number – calculating it requires assumptions, interpretations and often your own investment view.

Examples of the gap between valuation and value

History provides numerous examples where a company's stock market capitalization deviates from its actual financial situation – both in one direction and in the other.

Analysis (Facebook)

In 2022, Mark Zuckerberg's company experienced a dramatic price erosion in one year. Actions Meta lost about three-quarters of its value in 2022, falling from levels corresponding to a market capitalization of nearly a trillion dollars to around $230 billion by the end of the year. At one point, the price plummeted 26% in a single day, erasing a record $230 billion in market capitalization. In total, investors drained Meta of nearly $800 billion over the course of the year.

Did the company stop making money overnight? No – it still generated billions of dollars in profits and had a massive user base. One might, of course, wonder “what caused this decline”, some claimed that, for example, out of fear of growing competition (TikTok), the specter of economic recession or, as it was argued at the time, primarily the market's skepticism towards the costly vision of the "metaverse". However, the facts are that investors massively sold shares out of fear, today we know that they were overly pessimistic about the real value of the business (Meta has grown by over 700% since the bottom). Suffice it to say that throughout this decline, Meta continued to earn billions of dollars, was a profitable business, the revenue growth dynamics did indeed slow down a bit, but this decline at the peak was barely less than 4,5% year-on-year, which cannot explain the company's valuation drop by -76%.

So, from October 2021 to today, Meta first fell by -76%, then rose 700% from the bottom of those declines. This is precisely how the company's valuation developed, but can the same be said for its fundamental value? Which of the company's key business metrics declined enough to explain these declines? Or perhaps the internet has suddenly become unfashionable? Of course, it's easy to "think smart" retrospectively, but this "think smart" in no way undermines the thesis discussed in today's article – valuation and value are simply not equivalent terms.

Apple

Apple It also had periods when the market disbelieved its phenomenal business results. After Steve Jobs' death in 2011 and the spectacular growth of 2004-2012, Apple shares began to decline in late 2012 and by mid-2013 had fallen by 44% from their peak.

As a result, Apple became textbook undervalued – at around $13 in 2013, the company's shares traded on the market with a forward P/E below 8, while the average for its competitors was around 31. This was absurd, considering that Apple was still posting record profits and had over $130 billion in cash on hand. Furthermore, it's worth noting that during this decline, the company's quarterly revenue, though with a declining growth rate, was still higher year-over-year. Furthermore, all quarterly results reported during this period indicated revenue higher than at the price peak in late September 2012.

Rivian Automotive

At the opposite extreme, we have cases where the market values ​​new products and visions of the future at a huge premium, far outpacing the company's financial reality. Starting with an extreme example, electric car manufacturer Rivian Automotive went public in November 2021 and its share price immediately plummeted.  skyrocketed by several dozen percent. Rivian's market value reached over $100 billion at its peak shortly after its debut, surpassing the capitalization of giants like General Motors and Ford. This was astonishing, as at the time Rivian was just starting production, and the number of cars sold was negligible compared to the millions of vehicles sold annually by the aforementioned giants.

Rivian's CEO explained that investors "value what a company is capable of achieving in the future," not current performance. Indeed, the market "bought the dream" of an electric revolution, ignoring the fact that Rivian's current revenues were negligible – what mattered was the belief in its potential. This type of valuation is largely based on expectations and hype. History continued: after the initial euphoria faded, Rivian's share price fell by 90% in 2022, correcting the valuation closer to reality. This case, although extreme, perfectly illustrates how the market valuation of a young, promising company can be detached from its true value.

Tesla

Moving on – and at the same time to another “car manufacturer” – one of the most discussed cases of the last decade is Tesla, and therefore, for some, a symbol of the disconnect between valuation and current results. Elon Musk's electric car manufacturer achieved a market capitalization exceeding $1,46 trillion by the end of 2024. In the same year, according to official data, Tesla produced 1,773,443 cars. For comparison, the 5 largest car companies in terms of production produced in 2024, respectively:

1. Toyota Motor Corporation – approx. 10,3 million units
2. Volkswagen Group – approx. 9,2 million units
3. Hyundai Motor Group (Hyundai + Kia) – approx. 7,3 million units
4. General Motors (GM) – approximately 6,3 million units
5. Stellantis (Fiat Chrysler + PSA) – approx. 6,2 million units

At the same time, the total capitalization of these companies at the end of 2024 amounted to about ⅓ of Tesla's valuation, i.e. about $530 billion.

The difference is colossal, yet Toyota, Volkswagen, and GM still sell many times more cars per year than Tesla. So where does Tesla's enormous valuation come from? The company has long been achieving higher valuations than the largest automakers, and the above discussion is nothing new. Of course, this discrepancy can be explained in various ways. Some argue that For many years, the market has been discounting expectations that Tesla will dominate the future of the automotive industry, maintain high margins and generate astronomical profits in the future.

Investors valued not the current scale of operations (relatively small compared to the global car market), but the growth potential, "leapfrogging" a dozen or so years ahead. Today, as Tesla diversifies its operations into other areas, at least as much, and perhaps even more so, breakthrough technologies, this discussion is experiencing a renaissance on the one hand, and on the other hand, history may repeat itself, i.e. Tesla may once again record spectacular growth on the wave of speculation regarding the development and implementation of a new technology of potentially huge importance.

And here again, a dissonance appears between the company's valuation and its "real" value. Which is more valuable, Toyota, which produces 10,3 million vehicles per year, or Tesla, which produces over seven times less? Which has a higher valuation, and why is the difference so huge? Can these companies even be compared?

One has a massive business operating here and now, the other operates at the intersection of numerous groundbreaking technologies, is led by one of the most talented entrepreneurs of our time, and attracts the most brilliant minds from around the world. This is certainly a debatable issue, requiring consideration from several different perspectives, but it's definitely arguable that there's a risk that Tesla won't be able to implement new technologies, and then the gap between its value and its valuation could return to less speculative proportions. This doesn't mean, however, that Tesla is a bad investment today; it simply serves as a prime example in the discussion about the difference between value and valuation.

Nvidia

Over the past two years, Nvidia, the hardware giant, has become a symbol of the artificial intelligence hype. In 2023, demand for AI chips boosted Nvidia's results, and its shares soared several-fold from their lows in late 2022. However, in early 2025, the world's then-largest publicly traded company saw its valuation decline by over 40% in about three months. Let's repeat this for emphasis: the world's largest company lost almost half of its valuation in 3 months.

Here again, one could argue that this was due to the release of new AI software, the Chinese DeepSeek, which supposedly made more optimal use of the computing power powering this model, and investors saw this as a threat to Nvidia's chip sales. Well, at the time, the alleged negative impact on Nvidia was speculation; that is, literally no one knew how it would affect the company. because no one knows the future. And yes, that is what this article is about – Speculation governs valuation, not the value of a given company. How else can you explain Nvidia's decline of over 40% in three months, only to rebound by almost 120% in the next four? Did the company's real value also behave similarly during the same period? Suffice it to say that its sales results during that same period were astonishingly good.

The last, and perhaps most telling, fact confirming the thesis that valuation/price is not identical to value and the market is not always "right" are this year's returns on investments in individual sectors in the US market.

Data collected by Schroders as of the end of September 2025 shows how stratified the US stock market is. The largest price increases were recorded by Nasdaq companies that… generate no revenue – the average return in this category has reached a staggering 34% since the beginning of the year. This is a clear signal that investors were guided by speculative hopes for the future, rather than the current financial condition of companies. In second place were the so-called "Mag-7" (Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia, and Tesla) and unprofitable Nasdaq companies – both groups rose an average of 18%. For comparison, profitable Nasdaq companies returned only 8%, and small- and mid-cap companies returned a mere 5%. The so-called S & P 493 (i.e. the S&P 500 index without Magnificent 7), recording an average increase of 8%.

This chart perfectly illustrates that in 2025, the market wasn't rewarding companies with solid fundamental value, but rather those that fit popular narratives or offered an exciting, if often nebulous, vision of the future. From the perspective of traditional fundamental analysis, this distribution of returns looks downright absurd and is a prime example of the disconnect between valuation and value.

All of the above examples illustrate a key point: in the short and medium term, stock market valuations can diverge significantly from the real economy and the fundamental value of companies—both upwards (overvaluation) and downwards (undervaluation). Therefore, the market is "right" insofar as there's no point in arguing or getting upset about valuations, as we, as traders, can't do anything about it. We should simply be aware that valuations can be completely detached from the "real" value of a given company and adjust our strategy accordingly. On the other hand, it's also worth remembering that a stock chart doesn't necessarily reveal the truth about a company's health or prospects, as we've shown in the examples we've collected (the same, of course, applies to indices and the state of the economy).

The gap between valuation and value – causes

In practice, many factors contribute to the market price often deviating from its fundamental value. First, investor emotions cause the market to react "irrationally" or simply inappropriately to the state of the economy or a given company. Various psychological mechanisms, such as the herd effect, FOMO or loss aversion, cause ill-considered decisions to be made, which in turn lead to strong price fluctuations on the market or detachment of valuations from fundamentals, as exemplified by the Internet bubble or the 2008 crisis (many companies from those periods never reached their peaks again, many also went bankrupt).

Secondly, the market inherently values ​​the future, not the present. Therefore Prices also reflect expectations, often overly optimistic or overly pessimistic.

Another factor is incomplete information and incorrect analysis. Investors differ in their access to data and interpretation, which leads to misleading or simply different estimates of a given company's value – both by underestimating and overestimating the company's potential. The market is a collection of human opinions, not a perfect mechanism offering absolute truth.

Monetary policy plays an important role

Low interest rates and excessive cash flows encourage bubbles and detach market valuations from economic reality, while monetary tightening typically leads to sudden, often unjustified corrections. Furthermore, the market and the real economy often "run at different rhythms." The stock market can rise when recession looms over the economy, or fall even though the economic situation seems to be improving. It can also fall as a result of an escalation of a military conflict, or rise for the same reason – there's always some explanation for "why x or y happened," but we can also accept that it's usually difficult to obtain a definitive answer to this question.

Prices are also influenced by pure speculation and fashion. Capital flows into fashionable assets, regardless of their value, which fuels phenomena such as "meme stocks" or sector bubbles, but also fuels the world's largest companies (a constant inflow of funds to Mag7 due to the popularity of investing by ETFs).

Finally, sometimes technical errors, government interventions, or sudden shocks that temporarily disrupt valuations also determine crossovers.

Summary

So, is the market truly always right? The answer depends on the context. If we're talking about the short term and investment practice, yes, the market is "right" in the sense that the current price is a fact and it's better not to argue with it. It's a matter of humility. NEven if we believe that a stock is worth more, until the market recognizes this, our belief will not translate into profit. In this view, the market is the infallible judge of the moment and "has the final word."

However, from the point of view of economic value, the market can be misleading. We've seen many cases where stock market valuations deviated from reality, followed by a correction (up or down). The stock market makes valuation errors, sometimes enormous ones, but it has a tendency to correct them sooner or later, and we, as investors, can profit from them. However, it's worth being aware of the difference between value and valuation, as they aren't the same thing, and market participants often think of them in this shorthand way. This kind of thinking can also lead to viewing a company through the prism of its chart, and viewing the chart through the prism of a subjective opinion about the company, which can be both beneficial and disastrous, depending on the investor's strategy and the conclusions they draw from their analysis.

Ultimately, stock market valuations are a product of human judgment, and these are rarely perfect. The market is a brilliant consensus mechanism, but it is subject to moods, trends, misconceptions, and unpredictable events and manipulation. The real economy is governed by slightly different rules. Profits must flow from the sale of a product or service that provides value to customers, while a company's value stems from its ability to generate cash.