The return of fundamentals is here. So far this year, investors are behaving more like Warren Buffet than Cathie Wood.

Central bank excess and fiscal policies such as the Tax Cuts and Jobs Act of 2017, aka Trump Tax Cuts, the CARES Act, the Coronavirus Response and Relief Supplemental Appropriations Act, and the American Rescue Plan have been propping up the stock market since the 2008-09 Financial crisis.  As a result, companies with no apparent business models or no ability to scale have seen their valuations skyrocket.  

The rise of inflation and geopolitical issues has forced investors to look under the financial hoods of the self-proclaimed “disruptive innovative firms to see how disruptive their innovation is.  They don’t like what they see.   

Numerous firms have tens of billions of dollars in market capitalization, but they have negative earnings before interest, tax, depreciation, and amortization (EBITDA) or GAAP net income. 

More importantly, many of those firms cant even demonstrate their innovative capability to displace industry incumbents like they keep promising investors since their S-1 filings.

The Return of Fundamentals

According to Bank of America, 76% of the Nasdaq and 51% of the S&P 500 have entered the bear market territory, defined as at least a 20%  drop of a stock’s 52 week high. Investors who did not retreat entirely from the market found comfort in blue-chip companies with excellent balance sheets.

Companies with sizable cash and investments on their balance sheets will be in a better place to weather more hawkish Federal Reserve policies.

The Federal Reserve has signaled its intention to remove the punch bowl and raise rates to fight inflation. 

Over the past few weeks, due to violent market volatility, some investors exited the stock market and decided to hoard cash. Those investors will have to reenter the market sooner than later. The question is, when they get back in, will they behave more like Warren Buffet or Cathie Wood?