5 reasons why Sensex, Nifty may see selloff today; stock market outlook & more

Benchmark indices are bracing for a gap-down opening on Monday morning, taking cues from global markets such as Japan, South Korea and Australia that tumble up to 6 per cent amid concerns the US economy was headed towards a recession.

Besides, there were fears over the escalating war in the Middle East, with Israel bracing for an attack from the Islamic Republic and the Lebanese Iran-supported Hezbollah, as Iran reportedly rejected attempts by the US and Arab nations to de-escalate tensions.

Add to that are fears of FPI outflows from India, as the country was the best performing major market in July (4 per cent return), and that the MSCI India Index (up 37 per cent) has significantly outperformed the MSCI EM Index (up 4 per cent) in the past 12 months, raising concerns over market valuations. 

Weak Asian markets, recession fears in the US, geopolitical concerns, the uneasiness over domestic market valuations and likely FPI outflows are five factors that may weigh on the market sentiment on Monday.  

At 7.15 am, Gift Nifty was trading at 24,377.50, down 250 points or 1.02 per cent.

While the US Fed Chair Jerome Powell's recent press conference suggested the likelihood of a September rate cut, his base case and economic outlook remained consistent with a patient approach to rate cuts. While analysts do see two 25bp Fed rate cuts in September and December this year, fears are it may be too late to secure a soft landing.

"The rising unemployment rate, weakening manufacturing index and lowering of treasury yields cumulatively gives an alarming signal for the recession. However, the US government have been optimistic in its Federal Policy statement earlier this week on the grounds of easing inflation and stagnant job market," said Manoj Purohit, Partner & Leader, Financial Services Tax, Tax & Regulatory Services, BDO India 

"One needs to wait and watch the impact of the unchanged Fed rate in the coming months on the inflation and the unemployment numbers," he said.

V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services said the market had ruled out a rising possibility of a recession in the US. 

"FPIs may think of pulling more money out of India since India is the most expensive emerging market now. The developments in the US economy and markets in the coming days will set the trend for FPI in August," Vijayakumar said.

The median trailing PE of BSE500 companies is at 43 times – nearly 2 times the median earnings growth. The level is substantially higher compared with anytime in the past. In fact, in the 2000s, the median trailing PE of a BSE500 company was around 20–25 times with nearly 40 per cent earnings growth, Nuvama said.

"In 2010s, valuations outpaced earnings, but were supported by low rates. Today PEG also looks very high despite higher rates. The story is similar when one looks at valuation from a P/B perspective. The median P/B is 6 times with median RoE of just 15 per cent. This is unsustainably high," Nuvama said.

The median trailing PE of BSE500 companies is at 43 times – nearly 2 times the median earnings growth. The level is substantially higher compared with anytime in the past. In fact, in the 2000s, the median trailing PE of a BSE500 company was around 20–25 times with nearly 40 per cent earnings growth, Nuvama said. On a P/B basis, BSE500 is trading at 4.5 times – 20 per cent higher than pre-Covid level, but lower than the global financial crisis (GFC) peak of 6.5 times. 

On the technical side, the market breadth turned a bit exhaustive, indicating a sign of caution. 

Jatin Gedia of Sharekhan noted that the Nifty saw a breakout failure recently, as it did not witness follow through buying interest on the upside. 

"We expect the Nifty to retrace towards 24,600-24,550 where support in the form of 20-day moving average and 38.2 per cent fibonacci retracement level is placed. On the upside, 24,820–24,850 is the immediate resistance," he said.