Five reasons why markets will not run up further from here

• Even though macro-economic data such as diesel consumption, credit offtake, vehicles tolled and property sales are holding up well, the micro picture is not so rosy afterall. Valuations of Indian stocks are still trending way above 10-year average.
• Growth stocks likely to derate further as demand conditions weaken further after March quarter earnings.
• Global cues appear weak after recent inflation and payroll data emerging from the US. Hedge fund managers expect a hard landing for the US in 2023.

From the lows it plumbed in March this year, Indian equities are up by 8% in 2023 after dropping by over 11% in the January-March quarter. The macro indicators are also looking better than they were a few months ago and the monetary policy committee of the Reserve Bank of India has pressed the pause button on interest rate hikes. Retail inflation also eased to an 18-month low of 4.7% in April. Other high-frequency data such as diesel consumption, credit offtake, vehicles tolled and sale of residential property on a three-month moving average is doing fairly well. Ideally this should mean that the markets should continue their upward trajectory. The answer is a decisive no, as these triggers are not enough for the market to trend any higher. Here are five reasons why Indian markets will not stay range-bound after April and May’s rally.

1. Rich Valuations To Cap Further Upside: All the positive macro indicators like lower crude prices, inflation print for April and a temporary pause in rate hikes are priced in by the markets. A big factor that contributed to the rally was that valuations of Indian stocks had corrected to more rational levels in the March quarter after a sharp sell-off. With the recent run-up in stocks, valuations are back to elevated levels. According to Antique Stock Broking, Indian equities are trading at 19.5x1 year forward P/E multiple (against the long-term average of 18.4x), which is on a higher side given the above-mentioned risk and slowing domestic macro (evident from high-frequency indicators like IIP, E-way bill generation, electricity demand, petroleum consumption and auto demand).
2. Q4 Earnings Are A Mixed Bag As IT Services Play Spoilsport: The ongoing earnings season has thrown up mixed trends. According to analysis, 35 of the Nifty50 companies, which account for nearly 80% of the market capitalisation of the index, posted revenue growth of 13.3% and an EBITDA growth of 14.4% and profit growth of 15.4%. However, the results are not so charming if one excludes financials and the commodity sector. Nifty50’s EBITDA (earnings before interest, taxes, depreciation and amortisation) beat was driven by Reliance Industries and Tata Steel along with auto companies. The IT services and cement sector posted muted growth.
3. Weak Global Cues: The Dow and S&P 500 fell to new lows on Monday. The Dow slumped 336.46 points to 33,012 and the S&P 500 declined by 26.38 points to 4109.90 on weak retail sales data. The Nasdaq too ended down. Hedge fund managers are factoring a hard landing for the US. Last week, billionaire investor Stan Druckenmiller, in an interview with Fortune, said the US economy was teetering on the edge of a recession and predicted a “hard landing.” This has also spooked markets as so far most of the analysts and strategists have been predicting a soft landing. Also, recent payroll and inflation data from the US seems to suggest that a rate-cut cycle is unlikely to start this year.
4. Competitive Populism Could Pose A Risk To Fiscal Prudence in FY24: Analysts are worried that with the BJP losing the state elections in Karnataka, the trend of doling out freebies will come back with a vengeance. Strategists fear that populism may rear its ugly head in the upcoming state elections due to be held in Rajasthan, Chhattisgarh, Madhya Pradesh, Telangana, Mizoram and the 2024 general election. This could undermine fiscal prudence and efficiency in government spending.
5. Premium Valuations of Growth Stocks To Correct Further: Growth stocks in India have enjoyed unrealistically premium valuations for a long time. With a meaningful slowdown in growth now becoming inevitable, analysts expect a further de-rating of these stocks. According to Kotak Institutional Equities, “The Indian market is trading at ‘reasonable’ valuations compared to recent history and bond yields after lacklustre returns over the past 18-20 months. However, most ‘growth’ stocks, especially in consumption, investment and outsourcing space, are trading at expensive valuations, despite increasing near-term demand issues and medium-term disruption risks.”