What is a common limitation of fundamental analysis?

Fundamental analysis is a method used to evaluate the intrinsic value of a security by examining related economic and financial factors. One of the key limitations of this approach is its potential inability to fully account for sudden market volatility or external shocks.

Market conditions can change rapidly due to various unforeseen events such as geopolitical tensions, natural disasters, or sudden changes in government policy. These unexpected events can cause significant price movements in financial markets that are not predicted by fundamental analysis, which typically relies on historical data, company performance metrics, and economic indicators. As a result, fundamental analysts may find it challenging to adapt their valuations when external shocks occur, impacting their investment decisions and overall accuracy.

In contrast, the other options relate to definitions or characteristics of fundamental analysis that do not encompass the depth of its limitations, such as focusing solely on macroeconomic factors, providing short-term advice, or relying entirely on market sentiment. Each of these aspects plays a role in the broader analytical framework, but they do not capture the specific challenge posed by unpredicted market reactions.