Rich or resilient? Market valuation debate heats up amid Q1FY26 results

The long-drawn debate on India's stock valuation is back in focus as the market has recouped nearly 75 per cent of its losses. While benchmark indices hover near long-term averages, some analysts argue that current “rich” valuations claims overlook broader macroeconomic signals. 

 

Going ahead, besides macro-economic strength, corporate earnings growth, analysts suggest, holds the key for the markets to sustain at the current levels and even move higher.

 

Analysts at Anand Rathi recently downplayed concerns around rich market valuations, citing two key factors. First, this does not take into account the strong macroeconomic and robust corporate earnings growth.

   

Second, analysts see no significant rise in valuations relative to historical levels or global peers. The Nifty 50 is trading at 20.5x one-year forward earnings, near its 10-year median of 20.8x. In comparison, the Dow Jones and Chinese A-shares are trading at 22.3x and 17.8x forward earnings, both above their 10-year medians of 18.4x and 15.0x, respectively.

 

Further, the valuation premium of the Indian stock market over that of the US has narrowed notably. According to Business Standard data compilation, the NSE 500’s P/E ratio premium over the S&P 500 has also declined to under 1 per cent, down from nearly 5 per cent pre-Covid. 

 

However, the Nifty 50 continues to trade at a higher-than-average premium to Chinese A-shares. Anand Rathi noted that Chinese equities are pricing in strong earnings growth in 2025, supported by a low base and expected policy stimulus.

 

This comes amid cautious market sentiment, as muted first-quarter earnings could make high valuations a risk to further upside. Analysts expect India Inc to post single-digit earnings growth and a slowdown in revenue. 

 

According to various brokerage estimates, the combined net profits of the Nifty 50 companies are likely to grow 4.6 per cent year-on-year (Y-o-Y) in Q1FY26. The combined net sales (net interest income in the case of lenders) are expected to grow 5.5 per cent Y-o-Y in Q1FY26.  

 

Indian equities may appear optically expensive, but that premium reflects confidence more than complacency, according to Kalp Jain, Research Analyst, INVasset PMS. In fact, the narrowing of the India-US spread suggests a rebalancing of global positioning, not froth, he said.

 

When compared with other emerging markets (EMs) valuations, India's premium is elevated but not unprecedented. India's premium over EMs implies elevated expectations and little room for disappointment, Jain noted. "Valuations aren't cheap, but they're no longer outpacing fundamentals either. In that balance lies India’s strength."

Indian equities shine despite global weakness

The outlook for global equities in 2025-26 remains uncertain, with Anand Rathi noting that sentiment around Indian equities is even more cautious. "A closer look at the data reveals a different picture. Despite global uncertainties, Indian equities have not seen runaway valuations."

 

Furthermore, India’s fiscal health, improving inflation dynamics, and prudent monetary policy have led to falling bond yields, setting the stage for an expansion in equity multiples, Anand Rathi said. "Indian equities are not only fundamentally sound but also well placed for further outperformance in the years ahead."

 

Since hitting their lows in March this year, the Nifty50 and Sensex have gained 14.2 per cent and 13 per cent, respectively. However, the indices have declined by 2.5 per cent from their recent highs in late June.

 

The recent market consolidation looks less like a reversal and more like a recalibration, analysts said. The global setup has turned more benign, and it's driving renewed interest in emerging markets, Jain said. "The ongoing consolidation might extend in the near term, but India continues to offer one of the cleanest macro narratives globally."