Stock market meets physics: 5 laws that explain why prices move the way they do

Markets often feel noisy, headline-driven and chaotic, but beneath the surface, price action tends to follow a far more structured playbook. Equity markets, much like physical systems, are influenced by a small set of forces that repeat across cycles, sectors and timeframes. By borrowing ideas from classical physics, market behaviour can be broken down into a few intuitive laws that explain why some stocks compound steadily, others stagnate for years, and many prices snap back to long-term averages despite strong narratives.A recent strategy note from Ambit Capital highlights these 5 laws, offering investors a structured way to cut through market noise and better understand the mechanics driving returns.Law 1: Newton's inertia – cheap needs a forceAmbit’s first law maps Newton’s inertia to value investing: a cheap stock “stays cheap” unless acted on by an external earnings force in the form of upgrades, margin surprises or an inflexion in business momentum. Back‑tests show that the sweet spot is low starting valuation plus strong earnings acceleration, with the cheapest quintile combined with the best EPS revisions beating the BSE 200 around 76% of the time on a one‑year rolling basis since 2004.Law 2: Trajectory – momentum needs a vectorThe second law borrows from projectile motion to explain why some momentum trades fly and others flame out, even with similar past returns. Ambit finds that price speed alone is not enough: stocks with high momentum but low trend clarity tend to chop and mean‑revert, while high‑momentum names with smooth, linear trends deliver the bulk of momentum alpha over time.Law 3: Equilibrium – mean reversion with limitsUsing the math of a damped harmonic oscillator, Ambit recasts the market’s 200‑day moving average as an “equilibrium” level enforced by valuation gravity, flows, positioning and liquidity. Historically, Nifty drawdowns of about 10% below the 200‑DMA have produced a median 6‑month rebound of roughly 12%, but that pattern broke during shocks like the GFC and Covid when one or more restoring forces – earnings, flows or liquidity – effectively collapsed.Law 4: Resistance – growth vs valuationOhm’s Law underpins the fourth rule: growth is the current, valuation is the resistance, and returns are the voltage left after growth has pushed through that resistance. Ambit’s Nifty history shows that entry P/E bands below roughly 14–15 times have delivered double‑digit annualised returns over 5–10 years, while buying the index above about 20 times TTM earnings has usually led to much more muted outcomes despite healthy earnings growth.Law 5: Lift – RoE vs CoE altitudeThe final law treats valuation multiples as “altitude” sustained only when a company’s RoE (lift) consistently exceeds its cost of equity (gravity). On Ambit’s excess‑RoE vs price‑to‑book map, today’s Nifty trades above the fair‑value line, much closer to prior overvaluation zones like late 2007 than to “undervalued” episodes such as early 2009 and March 2020, implying that sustaining this altitude now requires either higher RoE or a structurally lower CoE.What it means for 2026?Taken together, the five laws leave Ambit cautious on broad Indian equities next year, especially richly valued small and midcaps where “resistance” is high and net “lift” is fading. The strategy team sees better risk‑reward in high‑trajectory momentum names, select value plus revision plays in OMCs, metals and PSU banks, and large‑cap BFSI, where valuations still look reasonable against RoE, while warning that a classic 10%‑below‑200‑DMA mean‑reversion trade is not yet on the table.(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)