From Record Highs To Relentless Declines, What Ails The Equity Market?

After touching record highs in September 2024, Dalal Street’s dream has turned into a nightmare in just a few months. What began as a small, normal correction in October has turned into a massive sell-off; the equity indices have been falling relentlessly since then without a pause, making retail investors jittery and investment sentiment turning most bearish since COVID.

With the prolonged downturn not finding a bottom yet, the question that arises is whether there is any relief in sight or is there more pain ahead. So, where are the BSE Sensex and NSE Nifty headed?

What is surprising is that nobody could see the fall coming the way it has panned out: a one-way slide wiping 94 lakh crore of investors’ wealth over five months. And that is the sad part of the story because when the going is good, no one, not even the investment and market experts, raises a red flag.

Instead, they proffer more rationale for fresh moves with stock ideas, sectoral rotation, and long-term investment themes. Now that the market is experiencing its worst losing streak in nearly three decades, all those predictions of the Sensex hitting 90,000 and the Nifty touching 30,000 have been replaced by fear about the road ahead.

While market analysts are advising caution and patience because the current decline is far from the most severe in the last three decades, technical analysts are busy finding crucial support levels for the Sensex and Nifty, which will stabilise the market even if temporarily.

But so far, all support levels above 22,500 on the Nifty have been violated, and the NSE index is close to 22,000. So far, both the Sensex and Nifty have declined by around 15 percent from their September highs, while the BSE midcap and small-cap indices have dropped over 20 percent. However, more than the indices, the real pain is in the broader market, particularly in the mid-, small-, and micro-cap spaces.

The reasons for the market’s prolonged decline are well-known by now: a combination of factors like elevated valuations, too much froth in the broader market, disappointing corporate results that do not support high price-to-earnings (PE) multiples, the FII money moving to cheaper markets like China, and the ongoing tariff war, besides overall global uncertainties and concerns over US slowdown that will affect Indian IT companies. Most of these issues affecting market sentiment are nothing new, and since September 2023, when the bull rally began, stock valuations were not cheap.

What changed the sentiment from October 2024 is the state of the Indian economy, as reflected in corporate results. Irrespective of the GDP numbers, the economy was perceived to be in not-so-good shape. This was evident in the companies’ quarterly results, particularly the FMCG businesses.

The commentary from a section of India Inc. six months back raised questions about the underlying strength of the economy, particularly consumption. For instance, in October 2024, Nestle India chairman spoke about subdued consumption, saying that the “middle segment,” which is the key market for the FMCG business, “seems to be shrinking.”

Earlier in May 2024, the Asian Paints CEO and managing director had said that “the GDP correlation has really gone for the toss in the current year. I also feel that today, I am not very sure of how the GDP numbers are coming.”

Over the last several years, the labour market data also does not indicate a strong underlying strength in the economy in terms of employment creation. In the current financial year, the GDP growth slowed to 5.4 percent (5.6 percent revised) in the second quarter from 6.7 percent in quarter one.

Though growth picked up in the third quarter to 6.2 percent, NSO’s 6.5 percent growth estimate for this fiscal year assumes that the economy will grow at 7.6 percent in the fourth quarter. But 6.5 percent GDP growth in FY2024-25 will be a drop of 2.7 percent from the revised 9.2 percent in 2023-24.

Though the market started correcting in October last year, its downward journey picked up pace after the Q2 results on November 30. Since then, it has been a sharp correction with no meaningful buying coming from retail, domestic institutional investors, and foreign portfolio investors (FPI).

The reluctance to buy, despite stocks being reasonably valued now compared to when they were at their peak and at a discount to their long-term average, is because there is uncertainty over whether India’s growth slowdown is over.

Also, the sell-India, buy-China trade, because Chinese equities are cheap, and the Donald Trump factor have affected the sentiment considerably. But the question investors, particularly FPIs, are asking is: has growth returned?

There may be a reason to believe that the Q3 GDP numbers indicate that India’s slowdown is over and the economy is in recovery mode. But what needs to be asked is whether the recovery is enough to stop the sharp sell-off in stocks. Part of the answer lies in growth in earnings per share (EPS) of corporates.

After four years of double-digit earnings growth, Nifty 50 EPS rose by only 5.5 percent in Q1 this year. In Q2, it dropped to 4.4 percent, triggering the sell-off, and the same was accelerated by dismal GDP growth data in the second quarter. The Q3 earnings growth was also weak at 5 percent.

Market analysts expect over 70 percent or 36 companies out of 50, to report slower than expected earnings growth in the next fiscal because of weaker demand outlook amid global uncertainties, subdued household spending, and slower credit growth. This explains the market’s relentless decline and FII selling.

Currently, the Indian market is one of the worst performers, while most of the major global indices continue to trade at premiums to their long-term averages. With the ongoing correction, Sensex and Nifty are trading close to their historical averages.

But given the bleak show in corporate earnings and the underperforming Indian economy not giving a boost to investment sentiment, expecting the market to rebound might be too optimistic without a clear earnings catalyst. Over the past 30 years, economic downturns, political upheavals, and global financial crises have, at times, erased more than half of valuations, proving that the Indian equity market has weathered far harsher storms before.

The most brutal crash occurred in 2008 because of the global financial crisis with the collapse of US banking giant Lehman Brothers. Yet, the market proved its ability to rebound. It will rebound again, but it will be a slow recovery. 

The writer is a senior independent Mumbai-based journalist. He tweets at @ali_chougule