Fundamentals vs Narratives: How Stocks Actually Move
STOCKS
“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” — Benjamin Graham
Fundamentals vs Narratives: How Stocks Actually Move
Most investors understand, at least intellectually, that stocks represent ownership in real businesses. Yet when prices move sharply, the explanation offered is almost always a story.
A headline. A macro theme. A technological shift. A change in sentiment.
This creates a tension. If stocks are claims on long-term cash flows, why do they seem to move so often for reasons that feel disconnected from business reality?
This article is about resolving that tension.
It explains how fundamentals and narratives both influence stock prices, but on very different time horizons—and why confusing the two leads many investors to poor decisions.
Early in the journey of stock investing, this distinction matters more than valuation techniques or stock screens. It shapes expectations, behavior, and discipline. It also sits at the core of [How to Invest in Stocks Without Gambling], which frames investing as a process rather than a series of reactions.
The Core Confusion Investors Face
Ask why a stock moved today and you’ll usually get a confident answer.
“Earnings missed expectations.”
“Rates are rising.”
“AI optimism.”
“Regulatory risk.”
Ask why a stock compounded well over 15 years, and the answer changes.
“Strong returns on capital.”
“Consistent cash flow growth.”
“Disciplined capital allocation.”
These are not the same explanations. They operate on different timelines and influence different types of decisions.
The mistake many investors make is assuming that the forces that explain short-term price movement are the same forces that determine long-term outcomes. They are not.
What Fundamentals Actually Are
Fundamentals describe the economic reality of a business.
They are slow-moving inputs tied to how a company creates value over time. At a high level, they include:
Revenue growth and durability
Profit margins and cost structure
Cash flow generation
Balance sheet strength
Returns on invested capital
Capital allocation discipline
These factors determine what a business can earn across an economic cycle and how resilient it is when conditions change.
Fundamentals are not opinions. They are reported, audited, and constrained by accounting rules. They evolve gradually, often predictably, and usually require quarters or years to change meaningfully.
This slowness is both their limitation and their strength.
What Narratives Actually Are
Narratives are explanations investors use to make sense of uncertainty.
They compress complexity into a story that feels actionable. Examples include:
“This industry will be disrupted.”
“This company is the next dominant platform.”
“Rates will stay higher for longer.”
“This stock is uninvestable because of regulation.”
Narratives are not inherently false. Many contain elements of truth. The issue is not whether a narrative is plausible, but how much future success it already assumes.
Narratives spread quickly because they are:
Easy to communicate
Emotionally resonant
Reinforced by price movement
Repeated by media and peers
They can dominate attention long before fundamentals reflect them.
Why Narratives Often Move Prices First
Stock prices are set at the margin. The next buyer and seller determine the price, not the long-term owner.
In the short term, prices move based on expectations, not outcomes.
Narratives influence expectations faster than fundamentals because:
Fundamentals update quarterly
Narratives update daily
Price reacts to changes in belief, not changes in truth
If enough investors accept a story and act on it, prices will move—even if the underlying business has not changed.
This is why stocks can rally on anticipation, fall on fear, or remain volatile despite stable operations.
From a market mechanics perspective, this is not irrational. It is a reflection of differing time horizons colliding in the same market.
The Time Horizon Mismatch
Markets aggregate participants with very different objectives.
Some trade over minutes or days. Others allocate capital over decades. Both groups transact in the same securities.
This creates a mismatch:
Short-term participants respond to narratives, momentum, and positioning
Long-term participants ultimately earn returns from business performance
Price volatility emerges from this interaction.
The danger arises when long-term investors begin interpreting short-term narrative-driven moves as signals about long-term value.
That is where discipline breaks down.
Why Fundamentals Matter More Over Time
Over long periods, stock returns converge toward the economic output of the underlying business.
This is not a belief. It is arithmetic.
A company that grows cash flows sustainably and earns high returns on capital has more to distribute to shareholders over time. A company that does not eventually runs into constraints.
Narratives can influence when returns show up. Fundamentals determine whether they can.
This is why:
Valuation excesses tend to mean-revert
Disappointments eventually surface in cash flows
Long-term performance clusters around business quality
The phrase “eventually, fundamentals matter” is often misunderstood. “Eventually” does not mean next quarter. It can mean years.
Investors who cannot tolerate that delay often abandon sound positions for compelling stories.
Valuation: Where Fundamentals and Narratives Intersect
Valuation is the translation layer between stories and numbers.
Narratives influence valuation multiples. Fundamentals influence the cash flows those multiples are applied to.
A strong narrative can justify a high multiple. A weak narrative can compress one. Neither guarantees future returns.
Two errors occur frequently:
Ignoring fundamentals because the narrative is compelling
Ignoring valuation because the fundamentals are strong
Both can lead to disappointing outcomes.
A business can be excellent and still deliver poor returns if expectations are too high. Conversely, a business can be mediocre and deliver acceptable returns if expectations are low enough.
This is one reason stock selection is more difficult than it appears and why many investors underperform despite access to information.
[Internal link: Why Most Stock Pickers Underperform]
Common Misconceptions Worth Addressing
“Markets don’t care about fundamentals anymore”
Markets always care about fundamentals eventually. What changes is the path prices take to get there.
Periods dominated by narratives often end with fundamentals reasserting themselves, not disappearing.
“Narratives are just noise”
Narratives are signals about attention, capital flows, and expectations. Ignoring them entirely can lead to poor timing or behavioral stress.
The goal is not to trade narratives, but to understand their influence without being controlled by them.
“If I understand the story, I can predict the outcome”
Stories feel predictive because they simplify uncertainty. Outcomes remain uncertain regardless.
Understanding a narrative does not eliminate risk. It often concentrates it.
Behavioral Traps Created by Narratives
Narratives create specific behavioral risks:
Recency bias: overweighting recent news
Confirmation bias: seeking stories that justify existing positions
Action bias: feeling compelled to respond
These biases push investors toward activity, not effectiveness.
Fundamental investing often feels uncomfortable because it requires patience and tolerance for ambiguity. Narratives feel decisive. That is precisely why they are dangerous when misused.
Risk is not just volatility. It is the risk of abandoning a sound process.
For many investors, aligning strategy with true risk capacity—not emotional tolerance—is the missing step.
[Internal link: Risk Tolerance vs Risk Capacity]
What This Means for Long-Term Investors
The practical takeaway is not to ignore narratives or obsess over fundamentals in isolation.
It is to align decisions with time horizon.
Short-term price moves are information about sentiment, not value
Long-term returns depend on business economics and valuation discipline
Most mistakes occur when these horizons are mixed
A rules-based framework reduces the influence of both fear and enthusiasm.
This is why diversified portfolios, disciplined rebalancing, and clear asset allocation matter more than interpreting stories correctly.
[Internal link: Asset Allocation Matters More Than Asset Selection]
Reframing How You Interpret Price Movement
Instead of asking, “Why did this stock move today?” consider asking:
Has the business changed?
Have long-term cash flow expectations changed?
Has valuation changed meaningfully?
If the answer is no, price movement is likely narrative-driven.
That does not mean it should be ignored. It means it should be contextualized.
Conclusion: Separating Movement From Meaning
Stocks move for many reasons.
Narratives explain movement.
Fundamentals explain outcomes.
Confusing the two leads to overreaction, unnecessary trading, and fragile confidence.
Long-term investing is not about predicting which story wins next. It is about consistently owning productive assets at reasonable prices and allowing time to do its work.
Discipline matters more than optimization.
Process matters more than persuasion.
For investors seeking structure rather than noise, understanding this distinction is foundational.
If you want to build on this framework, the broader principles are explored in How to Invest in Stocks Without Gambling, which focuses on decision-making systems rather than predictions.
The goal is not certainty. It is resilience.