Stock market strategy: Sharp disconnect between earnings revision and stock price movement, says Bernstein

Sensex and Nifty 50 continue to hit record highs led by stock market investors’ enthusiasm that led to a sharp bull rally this month. With the excitement over Lok Sabha election results now behind, market focus will shift to the fundamentals drivers.

An analysis of the top 200 stocks in India shows a sharp disparity between the stock price movements and the earnings growth.

In the last three months, 77% of the NSE200 stocks have seen positive price movements, but only 39% have seen earnings upgrades. Sectors with decent earnings upgrades show a disproportionately high movement in their stock prices – suggesting an optimistic overpricing, Bernstein India analysts Venugopal Garre and Nikhil Arela said in a report.

Also Read: Reliance share price hits a record high, m-cap tops ₹21 lakh crore mark; can it rise further after Jio tariff hike?

Moreover, the earnings revisions across the last two months have been a mere 0.6%, and the last month has seen a decline.

Smallcap and Midcap stocks (SMID) witnessed impressive returns nearing 21% this year and 19% over the last three months. However, their earnings expectations have come down, which has further inflated their valuations.

“A stark difference is seen in the top 100 and bottom 100 of our NSE200 stocks, with FY25 earnings of the top 100 almost flat c.1% while the bottom 100 declined by 2.6% over the last two months. This has led to nearly half the midcap 150 stocks trading at a 1-year forward PE of 40x or more. For large caps, this number is at 41%,” Bernstein report said.

Also Read: Indian govt bonds to enter JP Morgan Bond index from today; Here’s what to expect

Sector-wise analysis

Among sectors, seven of 13 sectors show a decline in the previous three months, and the average is barely 1%. According to the Bernstein report, metals and industrials seem to be the only sectors that have seen an acceleration in the last two months.

“Metals and industrials seem to be the only sectors that show a pick-up. Still, the disparities within are pretty high, and many prominent names exhibit declining earnings expectations for FY25. Autos and Energy are the other two sectors that show momentum but have slowed down considerably compared to the period before. Financials is seeing a modest 1.6% increase, while all other sectors are flat or negative,” Bernstein said.

Also Read: Stocks to Buy: Top 26 bottom up picks by Jefferies

Strategy going ahead

Bernstein believes there is limited scrutiny on earnings in such phases of markets and any idea is rationalized as the next wealth generator. Additionally, a broad positive 50-year view on India suffices the investment thesis and investors rush in to neutralize any valuation arbitrage they see.

According to Bernstein, this kind of “investing”, with a negligible assessment of models and governance, stays good till the cycle peaks.

Momentum chasing in the short term is too lucrative to stay away from. Still, a longer-term play on bottom-up ideas will always keep one safe when the domino effect takes over, it added.

Read all Stock Market News Updates here

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.