Why Fundamentals Matter

O’Shaughnessy Asset Management

Research

9 Pages

O’Shaughnessy Asset Management argues fundamentals reassert themselves when cheap money fades and narratives stop doing the heavy lifting. Using long history, it shows most equity returns come from earnings and cash returned to shareholders, while investors have recently leaned more on paying higher multiples, a setup that can unwind quickly when rates rise and enthusiasm turns into scrutiny.

Date published: August 16, 2022

Key Takeaways

Cheap money loops: Easy credit fuels narrative investing, and future equity returns tend to weaken when credit growth runs hot.
Fundamentals drive returns: Earnings growth and shareholder payouts explain most long run returns, while multiple expansion is a smaller contributor.
Multiple expansion risk: The last decade leaned more on valuation lift, so reversals can hit hardest when fundamentals were ignored.
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