Losing the grip: Markets' record run hits earnings reality hurdle

Earnings disappointment by blue-chip companies like Infosys and Hindustan Unilever halted the red-hot Indian market’s gravy train on Friday. Both the Sensex and the Nifty posted their biggest single-day fall in four months, while the gauge for the performance of IT stocks dropped over 4 per cent on renewed growth concerns.

The Sensex dropped 888 points, or 1.3 per cent to close at 66,684, while the Nifty 50 index closed at 19,745, with a drop of 234 points, or 1.2 per cent.

Shares of Infosys dropped 8.2 per cent — since April 17, 2023 — after the country’s second-biggest software exporter halved its full-year revenue growth outlook, once again fueling concerns over growth for the IT services sector.

The BSE IT index fell 4.4 per cent, which was the most significant decline among the 19 sectoral indices compiled by the BSE.

“The surprise lowering of revenue growth guidance for FY24 is premised on weaker discretionary demand leading to lower than expected volumes and slow client decision making, as per management,” said Nomura in a note to investors after downgrading the stock and lowering the target price. 

An overnight drop in the tech-heavy Nasdaq Composite index also contributed to tech stocks' bearishness, said market players.

Meanwhile, volume growth disappointment dragged HUL’s stock lower by 3.7 per cent. Shares of RIL also fell 2.6 per cent due to nervousness ahead of its June quarter earnings announcement. Infosys and RIL accounted for 70 per cent of the Sensex's losses.

From the March lows, the Nifty and the Sensex had rallied nearly 17 per cent amid relentless buying by foreign portfolio investors (FPIs). Despite the latest correction, the Sensex and the Nifty ended the week with gains of nearly a per cent.

“The markets were looking for a trigger to correct, and the earnings disappointments and cut in revenue guidance provided a reason to take some money off the table,” said Andrew Holland, CEO of Avendus Capital Alternate Strategies.

Shares of Larsen & Toubro (L&T) managed to buck the trend, gaining nearly 4 per cent to end at a record high. A day earlier, the company announced it was considering its first-ever share buyback. L&T’s board will discuss a proposal at its meeting on July 25.

Global cues were weak after some earnings disappointments at Tesla and Netflix, making investors doubtful about the tech rally powered by the bullish outlook around artificial intelligence. The US jobless claims data released on Thursday cast doubt over the optimism surrounding the end of the rate hike cycle. The applications for jobless claims fell by 9,000 for the week ending at 228,000 from 2,37,000 in the previous week.

The latest inflation and job data has kept investors guessing about what is likely to be announced at next week's US Fed and ECB policy meetings.

“Investors would also take cues from various macro data that would be released. With the result season picking up, we expect a lot of stock-specific action, which will provide direction to domestic equities in the coming week. Apart from Reliance, the banking sector is also likely to be in focus as ICICI Bank and Kotak Bank will announce results over the weekend,” said Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services.

Overall market breadth was mixed, with 1,530 stocks advancing and 1,854 declining. The Nifty Smallcap 100 index fell 0.72 per cent.

Both foreign and domestic institutions were huge buyers on Friday. While foreign portfolio investors (FPIs) bought shares worth Rs 11,423 crore, domestic institutional investors (DII) bought shares amounting to Rs 8,102 crore. On a net basis, FPIs were buyers to the tune of Rs 3,371 crore and DIIs of Rs 193 crore.