Sensex, Nifty: Why stock market bottom is still away; 'safe bet' Wall Street sends warning signal

While the domestic stock indices Sensex and Nifty have fallen quite a bit from their 2024 highs, stock analysts believe more near-term pain is likely, as investors are yet to price in a possibility of a US recession, intensifying trade wars and their impact on the global economy. They believe buying in India will emerge only when the domestic earnings get bottomed out. It is still some time away, they warned.

The imminent risk is from the US economy, as the US President Donald Trump refrained to predict whether the US could face a recession amid his tariff war. Wall Street has just started to acknowledge those fears. In overnight trade, Dow Jones plunged 2.08 per cent to 41,911.71. S&P500 crashed 2.70 per cent to 5,614.56. Nasdaq Composite sank 4 per cent to 17,468.32.

To be sure, the Atlanta Fed's GDPNow model estimate for annualised degrowth in the ongoing quarter came in at 2.8 per cent recently,  down from a growth of 2.3 per cent in the previous reading. A month ago, the model showed that growth in the January-March period was tracking close to 4 per cent.

"US stock market valuations have reached extreme levels. The Nasdaq-100 is trading at a P/E ratio of 34, i.e. an earning yield of 2.9 per cent, an indication that investors are treating it as a safer bet than US government bonds—a fundamentally illogical market trend. Furthermore, nearly 45% of companies in the Russell 2000 index remain unprofitable, exposing the fragility of the broader US equity market," said Ashika Global Family Office Services. 

At the same time, foreign ownership of US treasuries has dropped to a two-decade low, reflecting global investor skepticism about the stability of the US economy, it added.

Nuvama said the market correction in India so far is due to weak domestic earnings and high valuations. But with valuation premium over emerging markets back to 10-year average, India-specific de-rating is perhaps done, it said.

The RBI’s easing could provide near-term relief, Nuvama said while suggesting that rising global uncertainties (US growth slowdown and MAGA mania) pose fresh downside risks.

"Historically, during growth uncertainties, equities pivot only when rate cuts are deep, and valuations are cheap. Thus, earnings yields minus bond yields is a good guide for inflection points. This is still far from turning green. Maintain defensive bias," it said.