How Well Does Fundamental Analysis Explain the Returns of the Thirty Stocks in the Dow Jones Industrial Average?

Abstract

Due to the volatility recently experienced in the United States Stock market, this study aims to explain the relationship between fundamental analysis and stock returns over a quarterly time frame to take advantage of the swings in the market. This study includes both micro (firm-specific) fundamental indicators and macro variables that help explain the economy's health as a whole. This study takes the thirty stocks currently in the Dow Jones Industrial Average (DJIA) as of February 2024 and analyzes their returns and underlying financials. It uses accounting and financial ratios along with measures of the overall economy to try and capture opportunities to generate financial returns in the Stock Market. This paper offers evidence based on company panel data analysis on a quarterly basis from quarter one of 2014 to quarter four of 2023. The results produced from the model indicate an increase in recession risk and federal funds rate generate negative stock returns. In contrast, an increase in the Price-earnings ratio and analyst recommendations generate positive stock returns. The above variables are significant at the 5% level with an R squared of 0.126.