Stock market rally triggers caution as valuations turn 'expensive again'

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As Indian equity markets stage a strong comeback from their March lows, Jefferies flagged caution as valuations have turned "expensive again". 

 

The benchmark Nifty50 and the 30-stock Sensex are up over 14 per cent from their lows in April. The key gauges are only about 5 per cent away from hitting the peak levels they touched in September last year. 

 

The rally is mainly driven by the US-China trade deal relief and the de-escalation of the India-Pakistan conflict that nearly turned into a full-scale war, analysts at Jefferies said in a note. The recent rally has taken MSCI India valuations to 22.9x price to earnings (P/E), a 17 per cent premium to the 10-year average, the note said.

 

The rally in India has also been partly supported by a central bank easing cycle, the global brokerage said. While the lending financials are still trading below averages, the non-financial PE at 26.1x is 27 per cent above average, it noted. 

 

As of 11 AM on Friday, BSE Sensex was down 245.55 points or 0.30 per cent at 82,285.19, and NSE Nifty50 was down 77.7 points or 0.31 per cent at 24,984.4.

 

The strong rally in the domestic equities earlier in the week helped hit a seven-month high amid easing geopolitical tensions and renewed buying by global funds. The Nifty gauge is on track for its best week since mid-April, according to Bloomberg.   Catch Stock Market LIVE Updates Today   

Stock market rally to sustain?

The potential trade deal with the US could be a trigger for the markets to continue the rally, according to Jefferies. In an event with the business leaders in Qatar, US President Donald Trump said that India has “offered us a deal where basically they are willing to literally charge us no tariff.” However, he did not disclose any details regarding the latest talks with the South Asian country. The Government of India has not made any comments on Trump's remarks.

 

"Potential trade deal between India and US, on the lines of the UK-India free trade agreement (FTA), can be a near-term trigger," the Jefferies note said. 

 

The note added that the domestic flows may rise from here, but so could equity supply. Inflows into domestic mutual funds in April 2025 were nearly 50 per cent lower than the October 2024 peak. However, systematic investment plan (SIP) contributions appear to have stabilised, with a slight uptick recorded in April. "Our correlation analysis between foreign portfolio investor (FPI) flows and trailing 12-month market returns suggests that the worst of the return cycle may be behind us." 

 

If domestic flows bottomed out in the second half of 2024, as the data implies, any renewed surge in inflows could once again be matched by a corresponding rise in equity supply, it added.     ALSO READ: Nifty on track to hit 30,000 by December 2025? Here's what tech charts say

Q4 results assessment 

Earnings per share (EPS) growth expectations have moderated, Jefferies said in the note. While the March quarter results season has seen an improvement in the beat ratio compared to the previous quarter, the ratio of upgrades to downgrades for financial year 2025–26 earnings has deteriorated, it said. This reflects the impact of net interest margin (NIM) compression in banks and a weaker outlook for IT services. 

 

As a result, earnings estimates for MSCI India for the financial year 2025–26 have been trimmed by 1.1 per cent during the results season, with overall earnings growth now expected at 11 per cent.

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Jefferies investment strategy

The global brokerage trimmed its large overweight on financials and added weight to defence and cement stocks.   

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