The Indian stock market experienced a notable selloff on Thursday, July 25, as the benchmark indices, the Sensex and the Nifty 50, each fell by nearly 1%. This marks the fifth consecutive session of declines for both indices. As of today’s low, the Nifty 50 has dropped approximately 3% from its all-time high of 24,854.80, which it reached on July 19.
Immediate Negative Triggers
Weak global cues and the budgetary proposals to increase taxes on long-term and short-term capital gains (LTCG and STCG) are the primary reasons for the recent market downturn. While global uncertainties may continue for an extended period, concerns over capital gains taxes are expected to ease soon.
Potential for a Deeper Correction
There are significant factors that could lead to a deeper correction, potentially up to 10% or more in the Indian market:
The market is currently facing valuation concerns across various segments. Mid and small-cap segments are considered frothy, and large caps are trading at a premium. Key valuation metrics for the Nifty 50 are alarming, with the current price-to-earnings (PE) ratio at 24.5, higher than the one-year forward PE of 19.2. Similarly, the price-to-book (PB) value is at 4, above its one-year forward PB of 3.2.
“There are valuation challenges across caps. Valuations are higher also because, after a long time, there is comfort in terms of the durability of the growth rate,” said Pankaj Pandey, Head of Research at ICICI Securities.
Corporate earnings for the April-June quarter (Q1FY25) have been mixed, failing to uplift market sentiment. The market rally has been supported by strong earnings, but this growth appears to be slowing down.
“The rally in the Indian stock market has been supported by earnings growth. According to the latest Economic Survey, corporate earnings grew by 30% in FY24, and Nifty’s earnings rose by 24%. The Q1 earnings so far indicate a slowdown,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
“There are signs of deceleration in corporate earnings after the impressive 24% growth in Nifty earnings in FY24. The excessive valuations in certain segments of the broader market are unlikely to be sustained despite the irrational exuberance of retail investors,” added Vijayakumar.
The market seems to have already accounted for most positive triggers. With elections and the Budget behind us, there is a struggle to find new factors to sustain and extend market gains. Experts suggest that the lack of fresh triggers could lead to increased stock and sector-specific actions, with potential profit booking at higher levels.
