India's Stock Market: No Bull Run Until Corporate Earnings Pick Up, Experts Say

Indian markets have shown some recovery in recent weeks, with the Sensex and Nifty posting their second consecutive weekly gain. However, market experts are cautioning that a meaningful bull run will not resume until corporate India shows consistent earnings growth. Currently, the market remains 9% below its September peaks, bogged down by earnings downgrades, foreign fund outflows, and a strengthening dollar.

Earnings Growth Key to Market Recovery

For the Indian stock market to regain momentum and initiate a bull run, experts say that India Inc’s earnings growth needs to show significant improvement. Fund managers and analysts alike emphasize that unless corporate earnings accelerate, investor sentiment will remain muted.

According to Hemant Shah, Fund Manager at Seven Islands PMS, the Indian markets will need another 2-3 quarters to see a meaningful recovery. He stated that, with current valuations stretched, it’s unrealistic to expect major investments from foreign institutional investors (FIIs) or mutual funds in the short term. Indian equities are currently trading at 14 times FY27 profit estimates, a level that reflects high expectations, which might not materialize without stronger earnings growth from Indian companies.

High Expectations and Market Realities

The slowdown in corporate earnings growth during the Q2FY25 period has added to the concern. During the July-September quarter, the net sales growth for 694 listed Indian companies was just 8.04%, marking a significant slowdown from the previous quarter. Net profit growth was even more modest, rising only 3.9%, down from 15% in the previous quarter.

The earnings drag in Q2 was largely driven by oil refining and marketing companies, followed by micro-finance institutions. While sectors like metals, PSU banks, IT services, and pharma showed positive performance, the overall lackluster earnings results have kept investor sentiment in check. Analysts suggest that midcaps and smallcaps have been the hardest hit, with a substantial 76.7% of midcaps and 64% of smallcaps seeing earnings per share (EPS) downgrades for FY25.

Valuations and Foreign Outflows

The steep decline in earnings growth combined with high valuations has also played a major role in limiting the stock market's upward movement. Aishvarya Dadheech, Founder and CIO of Fident Asset Management, mentioned that markets are likely to remain on the sidelines for the next month or two, awaiting Q3 results as a potential catalyst for any upward movement.

While there have been foreign institutional investor outflows, there is also a broader market concern about the strengthening US dollar and its potential to impact Indian markets. In addition, renewed optimism in China has contributed to some foreign fund reallocations away from Indian markets.

Corporate Earnings: A Key Focus for Investors

Given the current situation, Sandeep Bagla, CEO at Trust Mutual Fund, highlighted the importance of a reality check for investors. He suggested that investors need to either adjust their expectations for India Inc's performance or wait for corporate earnings to accelerate significantly. Without either of these changes, he believes that fresh buying interest will remain sluggish and market recovery will be slow.

The market’s overall sentiment is further reflected in the growth expectations for Nifty. While analysts are projecting mid-teens growth for Nifty in the second half of FY25 and FY26, they caution that further earnings downgrades appear likely due to the current lofty expectations. As a result, the Nifty could face additional downward pressure if the growth outlook is not met.

The Impact of Earnings Downgrades

According to data from JM Financial, 66% of the companies under their coverage have seen EPS cuts for FY25. The downgrades have been particularly sharp in midcap and smallcap stocks, where the cuts have been the most pronounced. For FY26, more than 60% of companies have faced EPS downgrades, with largecaps and midcaps seeing the most significant cuts.

These earnings cuts are a reminder that despite the positive market movements in recent weeks, the underlying fundamentals are still facing significant challenges. The future trajectory of the Indian stock market will largely depend on how quickly corporate earnings can rebound, and whether these companies can sustain growth in the face of rising interest rates, inflationary pressures, and a slowing global economy.

What Investors Should Expect in the Coming Months

While the market has shown signs of recovery, the pace of this recovery is still uncertain. As investors await the Q3 earnings season, there are concerns that earnings growth may continue to be sluggish, especially in sectors like oil refining, real estate, and micro-finance. However, sectors like IT services, pharma, and PSU banks may provide some support to the broader market.

Analysts believe that for a meaningful bull run to materialize, there needs to be a reset in expectations. Investors may need to adjust their growth projections for corporate India, or the companies themselves will need to deliver more robust earnings growth to justify current market valuations.

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