Why Fundamentals Matter: The Truth About Market Movements

Understanding what moves financial markets is the holy grail of investing and trading. Ask any seasoned investor or trader, and they’ll tell you: while technical charts can offer great timing signals, it’s the fundamentals that anchor long-term value. Whether you’re trading currencies, buying stocks, or investing in commodities, ignoring the economic and financial bedrock beneath price movements is like sailing without a compass.

In this lesson, we’ll cut through the noise and dive deep into the real reasons why fundamentals matter, how they influence market prices over time, and why they should be at the core of your trading or investing decisions.

What Are Fundamentals?

Fundamentals refer to the core drivers of an asset’s value. These include both macro-level data like economic indicators and micro-level metrics like company earnings.

Types of Fundamentals:

Company-Specific Factors:
- Revenue growth, net income, return on equity (ROE), and earnings per share (EPS).
- Example: Apple’s consistent EPS growth over the last decade has been a major driver of its share price.
Macroeconomic Indicators:
- GDP growth, interest rates, inflation, employment rates, trade balances, and central bank policies.
- Example: A rising U.S. interest rate environment historically strengthens the U.S. dollar as capital flows into higher-yielding assets.
Supply and Demand Dynamics (Commodities):
- Oil prices, for instance, rise when OPEC cuts production—this is a fundamental shift in the supply side.
- Example: In early 2020, crude oil prices collapsed when demand dropped due to COVID-19 and supply remained high.

Fundamental analysis seeks to evaluate these elements to determine the intrinsic value of an asset and make forecasts based on economic reality—not speculation.

Why Fundamentals Drive Long-Term Market Movements

1. Intrinsic Value vs. Market Price

At the heart of fundamental analysis is the question: What is this asset truly worth?

If a stock’s intrinsic value (based on future earnings, assets, and business potential) is higher than its current price, it’s likely undervalued—an opportunity to buy.
If the price exceeds intrinsic value, it might be overhyped—possibly a bubble.

Example:
During the Dot-com Bubble, companies with no profits were trading at astronomical valuations. When reality kicked in (fundamentals), prices crashed. Amazon, however, survived and eventually thrived because it had real revenue growth and a viable long-term business model.

2. Predicting Long-Term Growth

Fundamentals allow you to look beyond the noise of daily volatility and ask, “Where is this company or economy heading?”

Is the country’s GDP expanding steadily?
Is inflation under control?
Is the company innovating and expanding its market share?

Example:
Investors who examined Tesla’s long-term growth potential, such as battery tech, market expansion, and regulatory tailwinds, held on through early volatility and were rewarded immensely as those fundamentals played out.

3. Spotting Red Flags

Fundamental analysis helps investors steer clear of dangerous traps. Poor fundamentals often signal underlying risks:

High debt-to-equity ratio
Falling profit margins
Shrinking revenues

Example:
Evergrande, the Chinese real estate giant, raised red flags years before its default through skyrocketing debt levels and slowing revenue—warning signs visible to any analyst paying attention to its balance sheet.

The Role of Fundamentals in Market Efficiency

Markets aren’t always rational in the short term, but over time, they gravitate toward fundamentals.

1. Supply and Demand Dynamics

This is particularly evident in commodity markets and currency trading:

A global wheat shortage due to droughts increases demand and pushes prices up.
A strong trade balance and positive GDP print in Canada strengthens the CAD against the USD.

Example:
In Forex, when the U.S. Federal Reserve signals aggressive rate hikes while the Eurozone is facing a recession, fundamentals push EUR/USD lower as investors favor the stronger economic backdrop of the U.S.

2. News and Sentiment Still Tied to Fundamentals

Yes, news moves markets—but more often than not, that news reveals fundamental shifts.

According to the Bundesbank [5], nearly half of intraday market movements are linked to news releases tied to economic data—things like:

Jobs reports (NFP)
Inflation (CPI)
Central bank statements

These aren’t just random events; they are fundamental insights being priced in.

Challenges in Fundamental Analysis

While powerful, fundamentals aren’t flawless.

1. Data Complexity

Analyzing balance sheets, interest rate differentials, and government policies requires deep understanding and access to reliable data.

2. Ever-Changing Variables

Inflation, global conflict, energy prices—they’re all moving targets.

3. Timing Issues

Sometimes it takes months or years for fundamentals to manifest in price.

Example:
In 2006, several analysts warned about an overheating housing market based on rising mortgage defaults and lending excesses. But it took nearly two years for the 2008 crisis to erupt.

Fundamentals vs. Technical Factors

Both are essential tools—but they serve different roles.

Fundamentals = Why

They explain why the price should move in a certain direction over time.

Technical Analysis = When

They help pinpoint when a move might begin or end, based on historical price patterns.

Example:
You analyze the British pound and find the UK economy is growing steadily with low inflation—bullish fundamentals. But technical analysis helps you find an entry point when the price breaks out of a consolidation zone.

Think of fundamentals as the map, and technicals as the compass.

Conclusion: Fundamentals Are the Market’s Backbone

If you’re tired of chasing every headline or reacting emotionally to market swings, it’s time to shift your focus. Fundamentals offer a solid framework for evaluating assets based on economic truth, not short-term hype. They don’t promise quick wins—but they do offer sustainable, rational insights that build wealth over time.

Whether you’re a Forex trader aligning technical entries with macroeconomic drivers, or a long-term investor building a portfolio for the next decade, fundamentals are your best friend.

So, next time someone tells you “charts tell the whole story,” smile—and remember: the truth about market movements always starts with the fundamentals.