A comparative analysis of fundamental and technical investment strategies: Empirical evidence from the S&P 500, 2021–2025

Details

Supervisors

Lassance, Nathan

Faculty

Louvain School of Management

Degree label

Master [120] : ingénieur de gestion, à finalité spécialisée

Abstract

enInvesting in finance is a dynamic and sophisticated field of endeavor where picking the right strategy will make the difference between generating sustained returns and eroding capital. In fact, the key challenge faced by portfolio managers and investors in general is finding investment methods that have strong theoretical underpinnings and empirical validation under diverse market circumstances. Such is the challenge tackled in this thesis. A comparison between two different investment strategies is carried out in this study using S&P 500 stocks in the period of 2021-2025: a fundamental buy and hold strategy using screening criteria to identify undervalued stocks according to value investing principles, and a technical method using moving averages crossover rules for trading. The main difference between these two strategies is in the underlying rationale and the process through which each is applied. Specifically, the fundamental buy and hold strategy uses the valuation of stocks, identifying those companies with favorable economic fundamentals such as low P/E ratios, increasing earnings, and appropriate levels of debt, in accordance with Damodaran (2012) and Fama and French (1992).The second relies exclusively on price signals, entering positions upon a Golden Cross and exiting upon a Death Cross, as documented by Brock et al. (1992) and Lo et al. (2000). An important methodological innovation made by this thesis involves the implementation of both approaches on exactly the same portfolio of stocks every year. In this way, the impact of the investing approach used is isolated and unaffected by possible distortions introduced due to different portfolios being used. This experimental setup provides for a much more thorough comparison of performance than those seen in other research works. From an empirical standpoint, there are notable distinctions between the two methods. While the fundamental approach proves superior in regard to performance, both absolute and risk adjusted, over a longer period of time, the technical approach produces better results when it comes to preserving capital, displaying lower volatility as well as a lower maximum drawdown compared to the other method. Importantly, the performance of the two approaches differs significantly based on the market environment, and this finding fully supports the Adaptive Markets Hypothesis proposed by Lo (2004). Specifically, the fundamental approach proves more effective during bull markets while the technical one prevails in bear market conditions as a result of lower risk-taking. As far as economic alpha is concerned, neither of the two methods produces statistically significant results as compared to a passive investment strategy over the entire period examined, thus corroborating the semi-strong Efficient Market Hypothesis. Overall, this dissertation has shown that fundamental analysis and technical analysis do not represent opposing approaches to investing but are rather complementary approaches to investing based on market conditions. These findings pave the way for future research into investment approaches that use the risk-reducing aspects of trend trading along with the returns generated by value investing.