Changing math: Earnings downgrades likely to overshadow valuation allure

Nifty at 17x may look attractive, but earnings downgrades cloud returns as Goldman Sachs cuts India outlook amid rising macro risks

The benchmark Nifty 50 currently trades at nearly 17x its projected 12-month forward earnings — about 13 per cent below its five-year average of 19.6x. 

At face value, such valuations have historically offered favourable entry points. However, returns at these levels are closely tied to the earnings cycle — whether markets are in an upgrade or downgrade phase. 

According to an analysis by Goldman Sachs, when valuations are in the 17x–20x band, three-month returns average around 7 per cent during periods of earnings upgrades. In contrast, returns tend to be muted — or even negative — over three- and six-month horizons when earnings are being revised downwards. The findings are based on more than 270 observations since 2003. 

The takeaway is clear: valuations cannot be viewed in isolation. The direction of earnings revisions is equally, if not more, critical. 

Reflecting this shift, Goldman Sachs has downgraded Indian equities to “marketweight” from “overweight” and cut its Nifty 50 target to 25,900 from 29,300, citing a deteriorating macroeconomic backdrop, particularly persistently high energy prices that could weigh on corporate profitability. 

The brokerage has also sharply lowered its earnings growth forecasts, slashing estimates by a cumulative 9 percentage points over the next two years. It now expects earnings to grow 8 per cent in CY26 and 13 per cent in CY27, down from earlier projections of 16 per cent and 14 per cent, respectively.