Sensex trading at discount to Dow Jones for the first time since 2009

A selloff on Dalal Street in the past five months has ended a long run of India’s valuation premium over the US equity market. The benchmark BSE Sensex trailing price-to-earnings (P/E) multiple has slipped below the earnings multiple of the Dow Jones Industrial Average for the first time since 2009. The Sensex is currently trading at 21.8x its underlying earnings per share over the past 12 months, down from a P/E multiple of 23.8x at the end of March last year.

 

In comparison, the Dow is trading at a P/E multiple of 22.4x, slightly down from 22.8x at the end of March last year, according to data from Bloomberg.

 

In the past two decades, the Sensex has traded at nearly a 25 per cent premium to the Dow valuation on average. The Sensex median trailing P/E has been 21x since March 2005, compared to the Dow median P/E multiple of 16x during the period.

 

In the past three years, there has been a contrasting movement in the valuation of these benchmark indices. While the Sensex has steadily become cheaper from the post-pandemic high P/E of 26x in March 2022, the Dow has seen a sharp rise in valuation after its P/E multiple hit a post-pandemic low of 15.6x in September 2022.

 

As a result, the Dow is currently trading at nearly a 40 per cent premium to its average (median) valuation over the past 20 years, while the Sensex’s current valuation is only 4 per cent higher than its historical average. 

 

Analysts attribute this to relatively faster earnings growth in the US in recent quarters compared to India and investors’ expectations that this earnings outperformance will continue in the foreseeable future.

 

“Corporate earnings in the US were up by 16 per cent year-on-year during the October-December 2024-25 (FY25) quarter, compared to 6 per cent growth in India. There is an expectation of similar earnings growth in the US in calendar year (CY) 2025, while the best estimate for India is 11 per cent earnings growth in 2025-26 (FY26),” says Dhananjay Sinha, co-head of research and equity strategy at Systematix Institutional Equities.

 

According to him, the earnings slowdown has led to a reduction in capital allocation to India by institutional foreign portfolio investors (FPIs) and an increase in their allocation to “more attractive” markets like the US, China, and Western Europe.

 

“Lower earnings growth in India translates into a higher price-to-earnings growth ratio for the Indian market compared to the US market, leading to a selloff by FPIs," says Sinha.

 

FPIs have withdrawn nearly ₹2.5 trillion from the Indian equity market since September last year. The Sensex is down 12 per cent during the period, while the Dow is almost unchanged.

 

In the past 12 months, the combined earnings of the US’ top 30 companies that are part of the Dow are up 8.9 per cent, compared to 10 per cent growth in the combined earnings of the Sensex companies. However, adjusted for rupee depreciation, the Sensex companies’ earnings growth works out to be only 5.6 per cent in US dollar terms.

 

“We have cut our FY25 and FY26 earnings estimates by 6 per cent each for our coverage universe. Earnings revisions reflect the continued slowdown in consumption and the weakening of government capital expenditure spending. If these do not pick up significantly in the next six months, there could be a risk to our FY26 earnings growth assumption,” writes Bino Pathiparampil of Elara Capital in his earnings review for the third quarter of FY25.

 

However, there is a possibility of an earnings cut for CY 2025 for US companies as well due to the negative impact of the president’s tariff wars launched on China, Mexico, and Canada — three of the US’ biggest trading partners.

 

“The tariff on US key trading partners is likely to translate into higher inflation in the US and may lead to a decline in consumer demand, which is negative for corporate growth and earnings,” says Satyam Panday, chief economist for the US and Canada at S&P Global Ratings in a recent interaction with Business Standard.