It’s August of 2025. By now, you’ve seen and heard these words across the financial media—frothy, stretched, elevated, rich—AKA a nice set of synonyms for "downright expensive."
When it comes to goods and services, prices reflect a number of components that fall into the two major categories of supply and demand. As it happens, public equity pricing dynamics have a little more in common with the fullness of store shelves than one might think.
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Figure SEQ Figure \* ARABIC 1 |
Let’s start off with some Econ 101. As consumers, we don’t acquire goods and retain services in a vacuum, but as part of a supply-demand relationship that exists for each of those goods and services. Each offering price signals a supplier’s cost and desired profit margin, and each purchase signals a consumer’s willingness to pay. I’ll spare you the derivatives and nonlinear relationships and refer instead to the simple expression of this dynamic in Figure 1.
We conclude that there’s a theoretical "equilibrium" price at which consumers are willing to buy the quantity that companies supply. In reality, there are regulations and externalities that impact the movements and shapes of these curves and therefore the market price.
When there are level changes in supply or demand, the curves and market prices will shift up or down. Depending on how fast prices increase or decrease because of these changes, a market will experience a rate of inflation or deflation.
In equity markets, fundamentals, macro conditions, monetary and fiscal policy, cost of capital, and required return are just a few of the driving forces for supply and demand and therefore valuations.
Recently, the pearl-clutching valuations in U.S. equity have been driven by excitement over AI, lower cash yields, and—as The Wall Street Journal recently reported—a strong “buy the dip” mentality amongst younger individual investors.1 The younger generation of retail investors has shown surprising resilience and endurance. They were increasingly likely to buy dips, stayed invested, and—over the last two or three years—reaped serious gains while institutional capital took chips off the table.
Layering on the concentration of interest and performance in Large Cap U.S. equities with a big appetite for shares has resulted in a supply squeeze that we believe has driven up valuations for the most sought-after companies. But we believe this isn’t the only compounding factor: Companies are playing a big role of their own.
As of August 11, American companies are on pace to repurchase over $1.1 trillion of their own shares in 2025, with over $983 billion already announced.2
There are several reasons management might opt for buyback programs: It’s already part of a capital allocation framework that prioritizes total shareholder yield, they’re unable to identify projects or acquisitions with sufficient Net Present Value to outweigh reducing costly equity capital outstanding, or maybe they just want to signal a belief that shares are undervalued.
Impetus aside, the outcome is still a reduction of shares on the open market and, often, an increase in the per-share value. As an active investor, it’s my job to exercise just the right amount of skepticism when it comes to these programs. I regularly weigh management’s choices to return cash through these programs rather than innovate or expand and determine whether their stewardship of capital meets my standard of quality and is consistent with the investment thesis.
Up to this point, I’ve relied upon a conceit that is at the center of economics: rationality. Because equity prices are simultaneously fully liquid and long-lived assets that form a basis of our plans later in life, we tend to treat them differently from any other asset class, however defined.
We sense intuitively when almost any other asset class is overvalued. How many of you have marveled over this last year how much houses are selling for these days in your area? We often pay less attention to other asset pricing movements, but because the stock market opens 250-plus days per year, every wiggle becomes an opportunity to exercise judgment.
While we as active managers can say with some confidence that the expectations investors are placing on the market are extremely high, our decision-making at Motley Fool Asset Management doesn't involve attempting to avoid some form of market-wide mean reversion. Instead, we keep ourselves grounded in our bottom-up, quality focused philosophy, keen on dialing down the noise and finding alpha for the investors who trust us to deliver, day after day.