Led by investor enthusiasm in the stock market that has led to an explosive bull run this month, Sensex and Nifty 50 continue to hit record highs.The excitement over the Lok Sabha election results will have passed and market focus will shift to fundamental factors.
An analysis of the top 200 Indian stocks reveals a huge disconnect between stock price movements and earnings growth.
Over the past three months, 77% of NSE 200 stocks have seen positive price movements, while only 39% have seen earnings revisions upwards. Sectors that have seen modest earnings revisions have seen disproportionately larger price movements, suggesting optimistic overvaluation, Bernstein India analysts Venugopal Ghare and Nikhil Arela said in a report.
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Moreover, earnings revisions over the past two months have been just 0.6%, with last month seeing a decline.
Small- and mid-cap stocks (SMIDs) have delivered impressive returns of nearly 21% this year and 19% over the past three months, but earnings expectations are falling, leading to further inflated valuations.
“There is a stark difference between the top 100 and bottom 100 stocks in the NSE 200, with the top 100’s earnings remaining broadly flat at around 1% in FY25, while the bottom 100 have fallen 2.6% in the past two months. As a result, almost half of the 150 midcap stocks are trading at more than 40 times one-year forward price-to-earnings. For largecaps, the figure is 41%,” the Bernstein report said.
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Sector Analysis
Looking at the sectors, seven of the 13 sectors have declined over the past three months, averaging just 1%. Metals and industrials are the only sectors that appear to have accelerated over the past two months, according to the Bernstein report.
“Only metals and industrials appear to be showing signs of recovery. Still, the disparity between sectors is quite wide, with many big names lowering their FY25 profit guidance. Auto and energy are showing momentum, but at a much slower pace compared to the previous quarter. Financials is seeing a modest increase of 1.6 percent, but all other sectors are flat or negative,” Bernstein said.
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Future Strategies
Bernstein believes that in these market moments, scrutiny of earnings is limited and any idea can be justified as the next wealth generator. Moreover, a 50-year, largely positive outlook for India is enough of an investment thesis that investors will rush to neutralize the visible valuation arbitrage.
According to Bernstein, this kind of “investment,” with little appreciation for the model and governance, will work until the cycle peaks.
Chasing momentum in the short term is too rewarding to avoid, but betting on bottom-up ideas over the long term will provide safety when domino effects occur, he added.
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Disclaimer: The views and recommendations expressed above are those of the individual analysts or brokerage firms and not that of Mint. We recommend that you check with a qualified professional before making any investment decisions.
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