What does "market efficiency" refer to in fundamental analysis?

Market efficiency in the context of fundamental analysis refers to the extent to which stock prices reflect all available information. This concept is integral to understanding how information is incorporated into stock prices, adhering to the Efficient Market Hypothesis (EMH).

In a market that is considered efficient, security prices adjust rapidly and accurately to new information, meaning that it is nearly impossible to consistently achieve returns that outperform the market averages through fundamental analysis or any other means. If the prices do reflect all available information, it does not guarantee that prices will always be correct, but rather that they will reflect information at any given point in time, including public and private data, economic indicators, earnings reports, etc.

Understanding this concept is essential for investors and analysts as it shapes their expectations of investment strategies. If a market is efficient, then fundamental analysis may not provide a significant advantage in predicting future price movements. Thus, recognizing market efficiency is crucial for making informed investment decisions.