Indian stock markets are facing a disconnect between corporate earnings and share prices. Even companies reporting better-than-expected results are seeing their stocks fall, as geopolitical concerns, regulatory developments and technical factors weigh on investor sentiment.
Rupen Rajguru, Head of Equity Investments and Strategy at Julius Baer India, told CNBC-TV18 that while near-term market behaviour remains difficult to explain, strong earnings growth and more comfortable valuations offer a more constructive picture for long-term investors. He believes the market could be approaching a bottom, although a recovery is not assured.
Why are stocks falling despite strong corporate earnings?
The recent sell-off has raised questions about why positive corporate results are failing to support share prices. Rajguru said profitability growth among around 100 companies that had declared their second-quarter results by the preceding weekend averaged 26–27%. The first quarter had also been strong.
Looking ahead, aggregate EBITDA growth for the current quarter is expected to be in the mid-teens, while profitability growth over the next two years is also expected to remain in the mid-teens.
Yet stocks have continued to decline, even when companies have exceeded market expectations.
“In the current scenario, sentiment is quite soured,” Rajguru said.
The weakness suggests that investors are looking beyond individual companies’ results and reacting to broader concerns affecting the market. Rajguru said both stocks driven by earnings performance and those supported by market narratives were facing selling pressure.
What is weighing on investor sentiment?
Several factors have contributed to the cautious mood, including geopolitical concerns, regulatory and judicial interventions, and expectations around taxation.
Rajguru said regulatory and judicial developments had hurt sentiment towards sectors such as hospitals and aviation. Certain rulings concerning additional tier-1 (AT-1) bonds had also added to the uncertainty.
Taxation expectations, particularly from a foreign portfolio investor (FPI) perspective, were another concern, although the anticipated developments had not materialised.
Foreign investor selling alone, however, did not fully explain the market’s weakness. FPI selling on Monday was at its lowest level in around 15–20 days, even as the market recorded a sharp fall.
Rajguru pointed to technical factors as another possible influence, saying certain technical indicators had been breached. He acknowledged that he did not have a definitive explanation for the market’s extreme near-term behaviour.
Why are small- and mid-cap stocks under pressure?
Small- and mid-cap stocks have been among the segments facing significant selling pressure, with micro-cap stocks also seeing a severe correction.
Rajguru said these stocks had performed well from the beginning of the year until the end of September, helping keep investors, including the high-net-worth individual (HNI) community, relatively comfortable with the market. The recent sell-off has changed that picture.
He noted that smaller stocks typically come under pressure in inflationary environments and when interest rates are high. In the current situation, however, liquidity is the key factor to watch.
Rajguru said there was no visible stress on the liquidity front so far, but any deterioration would need to be monitored.
What could trigger a recovery in Indian markets?
Rajguru identified crude oil prices and the performance of global AI stocks as two potential sources of support for Indian equities.
Oil remains a vulnerability for the Indian market. A significant fall in crude oil prices, driven by developments in global geopolitics, could trigger a relief rally, he said.
He also described India as an anti-AI trade. Global AI stocks had cooled off over the preceding week, and if that trend continued, Indian equities could find support and potentially establish a bottom.
These factors could improve sentiment, but Rajguru did not identify a definite trigger or timeline for a sustained recovery.
Are Indian stock market valuations attractive now?
Despite the near-term uncertainty, Rajguru believes the correction has made valuations more attractive for long-term investors.
He said valuations were around one standard deviation below their long-term average. Combined with expectations of continued profitability growth, this could create opportunities for investors willing to look beyond daily market movements.
Rajguru cautioned against trying to identify the exact bottom, arguing that day-to-day changes in foreign investor flows and market movements could distract investors from the broader picture.
“Historically, investing in such turbulent market environments has proven fruitful from a longer-term perspective,” he said.
His assessment is that Indian markets could be nearing a bottom because valuations have become more comfortable. However, this remains a tentative view, with near-term market behaviour still difficult to predict.