Stock market slide trims valuations, but key gauge still signals overvalue

Analysts caution that the small and mid-cap stocks are still not attractive even after they have corrected 13 to 16 per cent from peak levels

As Indian stocks brush aside concerns over tariffs, investors hoping for a valuation-driven entry may be left wanting, especially with this well-known indicator suggesting the market still is overvalued despite falling into a correction.

 

The Buffett Indicator -- the valuation gauge named after billionaire investor Warren Buffett -- is flashing caution for Indian equities as the market is still in the overvalued zone despite the recent rout. As of the end of March, the Buffett Indicator stands at 126.1 per cent, considered 'significantly overvalued', though it has eased from the peak level of 150 per cent seen in September last year, according to Business Standard calculations.  The Buffett Indicator, which is calculated by dividing the country's market capitalisation by its GDP, is considered significantly overvalued if it exceeds 115 per cent, according to some estimates. Any value between 98 per cent to 115 per cent is moderately overvalued, while a reading within 80 per cent to 98 per cent is fairly valued. Generally, a value above 100 per cent is read as the market being overvalued. 

 

Make smarter market moves with The Smart Investor. Daily insights on buzzing stocks and actionable information to guide your investment decisions delivered to your inbox.

Subscribe

 

 

Despite the stock market tumbling from its September peak amid multiple headwinds, including concerns over steep valuations, the Buffett Indicator has yet to ease to comforting levels. Even with benchmark indices down 9 per cent between September and April this year, the reading of the valuation gauge did not fall off to comfort levels. Since 2021, the average quarterly reading of the indicators stands at 116 per cent, suggesting that the current level is higher than its average level over the past few years.

 

However, this measure is often regarded as misleading given the inefficiencies. Even by other metrics, the valuation in India's stock market has not come off below long-term averages. India’s 12-month forward price-to-earnings (P/E) ratio of 21x is well above its 20-year average of 17.5x and its average recession trough of 9.7x. READ MORE 

 

Retail darlings remain stretched

 

Analysts caution that the small and mid-cap stocks, the so-called retail favourites, are still not attractive even after they have corrected 13 to 16 per cent from peak levels.

 

A look at small and mid-cap valuation multiples, either on a forward or trailing basis, whether at the cohort level or excluding BFSI, metals and energy, reveals that these counters continue to trade at a significant valuation premium, analysts at Ambit Institutional Equities said. "Looking at fundamental drivers, an increase in risk premium and slowdown in earnings growth also suggest that the current multiple appears unsustainable."

 

Mid-cap and small-cap 1-year forward P/E premiums to large-cap are 18 per cent and 13 per cent, respectively, versus a 7-year average of 7 per cent and -18 per cent, they said in a note. "Current multiples are unsustainable. Markets never move in a straight line, and the current bounce was driven by oversold conditions." 

 

Meanwhile, the valuation spread of the BSE 500 by Price-to-Sales (P/S) hasn’t changed much since April 1, 2025, Ambit Equities noted. However, some stocks that were trading at lower valuations have moved into higher valuation brackets. "Overall, the market remains one of the most expensive in history."

 

The market, however, has seen a strong comeback with the total market capitalisation (mcap) of BSE-listed companies crossing $5 trillion for the first time since early January.