Here are six key takeaways from analysts and strategists on what’s driving the divergence, what it means for investors, and whether the gap could narrow again.
1. The widest valuation gap in nearly two decades
As of early November 2025, the S&P 500’s price-to-earnings (P/E) ratio hovers between 28x and 30x, while the Nifty 50 trades near 22x. That places Indian equities at roughly a 20–25% discount, the widest since 2008.“The gap is being driven primarily by U.S. multiples expanding faster than India’s, rather than an outright de-rating in India,” said Naren Agarwal, CEO, Wealth1. “On trailing P/E, the S&P 500 is hovering near the high-20s while the Nifty 50 sits around the low-20s—leaving India at roughly a 20% discount, near a 17-year extreme.”
Agarwal said that the divergence is anchored in the “U.S. AI mega-cap surge,” while India’s earnings cycle is only just turning up after a soft FY25.
2. AI boom fuels U.S. valuations; Indian earnings yet to catch up
Historically, Indian equities have traded at a premium to the U.S. market. “When you plot a historical spread between S&P 500 and Nifty 50 as far as your trailing P/E is concerned, the average mean has been positive 0.8 or one,” said Hitesh Jain, Strategist at YES Securities. “That means your Indian market generally used to have a higher P/E than the S&P 500.”But things have changed in recent years. “The U.S. has a catalyst in the form of AI, where the ‘Magnificent Seven’ companies have strong earnings and cash, helping them command higher ratios,” Jain said.
Jain said that Indian equities have been weighed down by “disappointing earnings since the last six quarters,” though he believes “this gap is certainly a good buying opportunity for long-term investors in India.”
3. FII flows have amplified the gap
Foreign institutional investors have been steady sellers this year, pulling down valuations even as domestic money poured in. Agarwal said FPIs were net sellers through most of 2025, about $16–17 billion by early November, while domestic mutual funds absorbed the selling with record inflows.
“FIIs have played a significant role in widening the valuation discount by withdrawing approximately Rs 1.27 lakh crore from Indian markets in FY25,” said Abhinav Tiwari, Research Analyst at Bonanza. “However, FII outflows have partly been offset by a historic rise in Domestic Institutional Investor (DII) participation.”
Harshal Dasani, Business Head at INVasset PMS, said foreign investors “have influenced the pace and volatility of India’s premium, not its foundation.” Despite over Rs 1.9 lakh crore in FPI outflows this year, he noted, “domestic mutual fund inflows of Rs 28,000–30,000 crore per month offset the selling, keeping valuations elevated.”
4. Opportunity vs warning: Experts divided
Views differ on whether the widening gap is a red flag or a chance to buy. Agarwal believes it’s “more opportunity than omen,” pointing to easier financial conditions and early signs of an earnings rebound.
“Historically, phases when India traded at a discount to the U.S. have tended to mean-revert as earnings visibility improved,” he said.
Hitesh Jain, Strategist at YES Securities, agreed that the current discount offers a “good buying opportunity for long-term investors in India.” He noted that “a correction in Indian stocks started in September 2024 and after six quarters of consolidation, valuations for most have adjusted to present a good opportunity, especially in the midcaps and smallcaps.” Jain added that “consumption, discretionary and financials present opportunity,” and that “once consumption starts ticking higher, that will obviously reflect into earnings growth. Market valuations are nothing but a slave of earnings.”
Dasani, meanwhile, cautioned that India’s premium “is a double-edged signal.” While elevated valuations reflect confidence in India’s long-term growth engine, they also “warn against chasing momentum or paying top multiples without earnings support.”
Tiwari said the discount reflects both “structural and cyclical factors,” adding that “about half the gap is cyclical and the other half structural.” He noted that GDP growth has moderated to around 6.3–6.5% expected in FY26, while weak corporate earnings and trade tensions have also weighed on valuations.
5. What could narrow or widen the gap from here
Analysts see several catalysts that could narrow the gap. Agarwal pointed to “continued Nifty EPS upgrades into FY26, stabilization or reversal of FPI flows, and easier domestic financial conditions filtering through post-RBI cuts.”
Dasani agreed that the “valuation premium is likely to remain elevated but range-bound,” with scope for tactical compression if global growth rebounds or EM flows rotate. He said the next leg of the rally “will depend less on multiple expansion and more on earnings quality, policy execution, and disciplined capital allocation.”
Jain from YES Securities said Q2 FY26 “has been a harbinger of revival,” adding that “once consumption starts ticking higher, that will reflect in earnings growth. Market valuations are nothing but a slave of earnings.”
Tiwari cautioned that much depends on the AI narrative and said, “If AI adoption or monetization slows, U.S. valuations could correct, which might narrow the India–U.S. gap.”
6. Where the opportunities and risks lie
Experts see selective opportunities despite the divergence. Jain highlighted “consumption, discretionary, and financials” as attractive for long-term investors.
Dasani said “large banks and select NBFCs trade near long-term averages and stand to benefit most from liquidity easing,” while “overstretched capital goods and speculative small-caps appear vulnerable if sentiment softens.”
Agarwal added that private banks, industrials, and utilities “look attractive for their balance of valuation and growth,” whereas “richly-valued capital goods and small/micro-cap pockets” may face pressure.
Also read | Tata Motors Commercial Vehicles hits top gear on debut post demerger. Here are 7 takeaways from the listing
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)