Changing course: Nifty's valuation edge erodes as US Treasury yields surge

Historically, there is a negative correlation between US 10Y treasury bond yield and Nifty 50 valuation

A recent surge in US bond yields, combined with lacklustre corporate earnings in the March 2025 quarter, is weighing on Indian equity valuations and could pressure stock prices further. The earnings yield on the Nifty 50 benchmark index has fallen 64 basis points since the end of February, while the yield on 10-year US Treasury bonds has risen 27 basis points over the same period. 

As a result, the yield spread — the difference between India’s equity earnings yield and the US risk-free rate — has turned negative for foreign investors, slipping to -18 basis points from a 21-month high of 64 basis points at the end of February. This marks the lowest level since April 2024, and represents a significant shift after remaining positive through the end of April 2025. 

Historically, Indian equity valuations have shown an inverse relationship with US bond yields. A drop in Treasury yields often triggers a rally in Indian stocks and boosts the Nifty 50’s trailing price-to-earnings (P/E) multiple. Conversely, rising bond yields tend to compress equity valuations, albeit with a lag. 

Earnings yield, the inverse of a security P/E multiple, indicates the yield an investor would earn if a company distributed its entire annual profit as dividends among its shareholders. 

 

“Bond yields have surged in the US in recent months, and that is likely to have an adverse effect on asset prices, including equities,” said Dhananjay Sinha, co-head of research and equity strategy, Systematix Institutional Equity. “But we have also seen a decline in market risk premiums since US President Donald Trump backtracked from tariff wars, diminishing the possibility of a recession in the world’s biggest economy. That has helped offset some of the pressure from higher yields, fuelling a global equity rally, including in India.” 

Similar patterns have played out in recent years. In 2020 and 2021, falling US bond yields coincided with rising Nifty 50 valuations. Conversely, the second half of 2021 and early 2022 saw a rise in yields and a subsequent dip in Nifty’s P/E multiple. Over the past two years, both earnings yield and bond yields have remained relatively stable, moving within narrow ranges. 

The narrowing of global risk premiums has also driven a reversal in foreign capital flows. Foreign portfolio investors (FPIs) have resumed net purchases of Indian equities, injecting $2.18 billion in May (until May 16), following net inflows of $530 million and $621 million in April and March, respectively. This comes after outflows of $5.3 billion in February and $8.4 billion in January. 

Buoyed by these inflows, the Nifty 50 index has risen 2.8 per cent this month (until May 16), and is up 13 per cent since the end of February. 

Still, analysts caution that this rally may prove short-lived amid continued earnings softness and elevated valuations. “Adjusting for volatile items, earnings per share (EPS) grew by mid-single digits since the June (2025) quarter. This weakness is set to continue in the next quarters and we do not expect a strong earnings rebound this year. Private capex is yet to pick up, urban consumption remains soft, and growth in IT services could be weak amid policy uncertainties in the US,” wrote analysts at HSBC Global Research in their recent strategy report on the Indian equity market. 

The Nifty 50’s underlying EPS is up just 5.1 per cent year-over-year, the least in 51 months. Yet, the index’s trailing P/E multiple had climbed to 23.3x as of last Friday, up from a 57-month low of around 20x at the end of February. 

“Forward earnings revisions continue to show weakness, with downgrades outstripping upgrades,” wrote analysts at Motilal Oswal Securities in their interim result review of Q4FY25 earnings.