Earnings disappointment a catalyst for market correction: Analysts

Earnings disappointment could be the next big catalyst for a market correction over the next few weeks as India Inc unveils its numbers for the July - September 2024 quarter (Q2-FY25), and the recent commentary by two-wheeler maker Bajaj Auto (BAU) on tepid sales in the festival season has set a cat amongst pigeons.

Fast moving consumer goods (FMCG) giant Nestle, too, disappointed the street with a modest uptick in sales for the recently concluded quarter.

The developments come at a time when the markets are already grappling with geopolitical developments in West Asia and the uncertainty surrounding the outcome of the US presidential polls. That apart, Reserve Bank of India's (RBI's) caution on inflation in the recent policy review meeting is also on the market's radar.

Concerns on earnings not picking up to justify the current market valuation and valuations of select stocks, according to G Chokkalingam, head of research at Equinomics Research, is not limited to the autos, but could be a wider consumption-related sectors’ issue.

Within the various market segments, the mid-and small-caps could see a sharper fall if earnings do not meet expectations, he cautioned, as a number of stocks from these two baskets had run up sharply in the last 12 -18 months.

"Inflation and higher interest rates for longer at a time when other global central banks are cutting rates are a dampener for market sentiment, especially the consumption space. While some may pass on the higher input cost to the consumers, topline and margin growth for a lot of companies in the consumption-related sector may be an issue. The pain is likely to persist for another quarter," Chokkalingam said.

Consumption-related sectors

Nomura India Coincident Activity Index (NICAI) – a composite index covering consumption (vehicle sales, two-wheeler sales, tractor sales, diesel sales, consumer goods’ industrial production, aviation passenger traffic, etc.), investment (capital goods production, medium and heavy commercial vehicle sales, coal, steel, cement, electricity generation, etc.) and the external sector (merchandise exports, services exports and visitor arrivals) - has been on a steady decline since the past few months.

Aggregate NICAI growth, Nomura said, slowed to 4.1 per cent Y-o-Y in August from 6.5 per cent in June and 7.0 per cent in March, and the preliminary reading for September is further lower at 3 per cent.

At the macro level, meanwhile, the 6 per cent correction in Nifty from the peak has made India an under-performer with only 13.83 per cent return year-till-date (YTD) in contrast to the 23.16 per cent return in S&P 500 during this period.

Thus far in October 2024, consumption-related stocks and sectors have fared badly. The Nifty Auto index has been the worst performer, slipping nearly 8 per cent during this period. Nifty Oil & Gas, Nifty FMCG, Nifty India Consumption and Nifty Metal indices have lost between 5 – 7 per cent during this period, ACE Equity data show. The Nifty, on the other hand, slipped 4.1 per cent.

"Consensus downward revision of fiscal 2024-25 (FY25) earnings estimates to below 10 per cent and Bajaj Auto’s concerns regarding weak demand during the festive season have dampened the market sentiment. A bounce-back is likely in the immediate term, but it is unlikely to sustain since the overall sentiment has turned weak," said V K Vijayakumar, chief investment strategist, Geojit Financial Services.

The market performance over the next few weeks, analysts suggest, will remain stock specific as market’s reward companies that deliver on earnings. Investors, they advise, should stick to the safety of the large-caps in this uncertain phase.

"There will be select pockets of earnings disappointment and growth. Investors will be better off in adopting a wait-and-watch strategy and invest only in stocks of those companies that deliver on earnings and there is earnings’ visibility too for the next few quarters," Chokkalingam said.