The recent surge in Indian stock markets has cast a spotlight on the country’s valuation, which remains among the highest compared to its global peers. As concerns about economic growth and corporate profitability loom large, the benchmark Nifty index experienced a remarkable upswing, climbing 1,769 points (an impressive 8%) from its recent low of 22,082.65 on March 4, ultimately closing at 23,851.65 on Thursday.

Current Market Valuations

While stock prices have rebounded, the Indian market is still considered more affordable than during the September-December 2024 period, when the Nifty was trading beyond 23 times earnings. The situation was particularly extreme in early October when valuations reached nearly 24 times. However, experts warn that the landscape may not be as rosy as it appears.

Economic Concerns and Earnings Outlook

The recent tariffs imposed by the United States could pose significant risks to India’s already slowing economy, raising doubts about future earnings growth. According to a leading mutual fund CEO, “Valuations offer little comfort, as it is primarily liquidity driving the stock price increases.” This sentiment is echoed by analysts predicting that India’s GDP growth for FY26 will be just over 6%, a downward revision from earlier forecasts of 6.4-6.5%. Notably, strategists at Morgan Stanley have recently scaled back their earnings estimates due to the unpredictable global economic landscape.

Adjustments in Earnings Estimates

Morgan Stanley’s analysts, Upasana Chachra and Ridham Desai, reported a 13% decline in their FY26 earnings projections, attributing this shift to global economic challenges. Nevertheless, they believe that domestic growth will benefit from increased government spending and a supportive stance from the Reserve Bank of India (RBI), maintaining that "India’s medium-term earnings cycle remains intact."

Future Growth Projections

In a similar vein, HSBC Global Research indicates that after accounting for volatile factors, earnings per share have only seen moderate growth since the June quarter. Analysts Herald van der Linde and Prerna Garg predict that this trend of weak earnings will persist, with expectations for year-on-year growth of less than 5% in the first quarter. The lack of robust private capital expenditure, soft urban consumer demand, and uncertainties in the IT services sector are all contributing to these concerns.

Earnings Estimates from Brokerages

As we approach the earnings season for the March quarter, firms like Kotak Institutional Equities (KIE) project cautious earnings growth for the Nifty 50, estimating Rs 1,145 for FY26 and Rs 1,312 for FY27. Based on these predictions, the Nifty currently trades at approximately 20.8 times earnings, which translates to 21 times FY26 earnings and 18 times FY27 earnings. For the BSE 30 index companies, KIE expects earnings of Rs 3,772 for FY26 and Rs 4,356 for FY27.

Conclusion

In summary, while the Indian stock market has shown resilience with a significant rally, underlying economic concerns and cautious earnings projections paint a more complex picture. Investors should remain vigilant and consider these factors as they navigate the current landscape. For additional insights on market trends, check out our latest articles on economic forecasts and investment strategies.