Broadly, analysts suggest that market valuations have entered neutral territory, offering limited room for re-rating but a stable base for long-term compounding. As Axis Securities notes:
“Current valuations offer limited scope for re-rating; hence, the market will follow earnings growth.”
With earnings expected to revive from H2FY26 and the potential for a US–India trade deal supporting sentiment, the setup for a medium-term recovery may already be in place, even if the short-term outlook feels uninspiring.
“The equity market may be underestimating the likely turn in the growth cycle,” said Ridham Desai of Morgan Stanley in a recent note. “While global factors matter for India’s relative performance, in our view, the earnings and market peak is still in front of us.”
Three key metrics reveal where the market stands:
1) Buffett Indicator: Approaching Fair Value
India’s total market capitalization to GDP ratio is trading at 131%, above its long-term average. However, based on projected nominal GDP for FY26, the ratio works out to 119%, indicating fair valuation. According to the Union Budget 2025-26, the FY26 GDP assumption is pegged at Rs 356.97 trillion, Axis Securities said.”Historically, similar upward earnings momentum was seen in FY10, immediately after the GFC, when the market cap-to-GDP ratio reached 95–98%,” Axis added. “With positive earnings momentum in the current cycle, we are likely to see higher MCAP-to-GDP ratio levels in the upcoming quarters.”
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2) BEER Ratio: Cooling Off After Correction
The Bond-to-Equity Earnings Yields ratio is now trading slightly above its long-term average following the equity market correction, Axis Securities noted. Bond yields have fallen by 30 basis points since November 2024, marking the start of the US Fed’s rate cut cycle.
“A consumption boost, fiscal consolidation in the Union Budget, and rate cuts by the RBI indicate some cooling off in bond yields,” Axis added.
3) PE Valuation: Trading Near Historical Average
The Nifty now trades at a 12-month forward P/E of 20.6x, close to its long-term average of 20.7x – a 1% discount. Conversely, the P/B ratio at 3.1x represents a 9% premium to its historical average of 2.9x, Motilal Oswal said.
Sector valuations: Automobiles, Consumer, Technology, and Real Estate now trade near their long-term averages, while Capital Goods, PSU Banks, NBFCs, and Utilities trade at a premium to historical levels.
Axis Securities’ market valuation index continues to trade slightly above the first standard deviation. “Current valuations offer limited scope for re-rating. Hence, the market will follow earnings growth. Stock selection and sector rotation will be key to achieving outperformance,” Axis said.
Targets and earnings: ICICI Securities maintains its Nifty50 target at 27,000, expecting a 13-14% CAGR in Nifty50 earnings over FY25-FY27E.
Structural optimism: Morgan Stanley’s Ridham Desai highlighted a structural case for optimism: “Relative valuations have reversed and growth is likely to rebound, setting India up for better relative performance in the months ahead.”
He added that India’s low beta implies outperformance in a global bear market but underperformance in a bull market, as currently observed. The growth slowdown that began in H2FY24, coupled with rich relative valuations, appears to be the key fundamental driver.
“High growth with low volatility, falling interest rates, and low beta equals higher P/E,” Desai said, noting that falling oil intensity in GDP, rising export share, especially in services, and fiscal consolidation imply structurally lower real rates and support a shift in household balance sheets toward equity.
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What should investors do?
Vinay Paharia, CIO, PGIM India Mutual Fund, remains constructive: “We remain constructive on Indian markets over medium to longer term due to a confluence of factors such as sustainably high GDP growth, rising per capita income, financialization and digitization and a positive policy environment which could lead to steady growth for India Inc.”
From a near-term perspective, key factors include US-India trade negotiations and tariff developments, festive season demand, and revival of earnings momentum in domestic consumption-oriented sectors, Paharia said.
“We expect the Q2 FY26 earnings growth to be modest due to the late impact of GST reforms but expect revival of earnings from Q3FY26 onwards on the back of significant above-average monsoon in the Kharif season and various fiscal and monetary measures by the Indian Government and Reserve Bank of India to revive consumption growth,” he added.
HSBC Mutual Fund echoed similar views, emphasizing that despite near-term volatility driven by global trade tensions and FPI outflows, India’s structural strengths, such as robust domestic consumption, policy continuity, and a resilient banking system, continue to support long-term economic growth.
The setup for a medium-term recovery may already be in place with earnings expected to revive from H2FY26 and the potential for a US-India trade deal supporting sentiment, even if the short-term feels uninspiring. For this Diwali, the message from valuations is clear: the market has corrected enough to offer a neutral entry point, but the real fireworks will only come when earnings momentum returns.
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