At first glance, it seems that the Indian stock market has entered a fresh bullish phase after the General Election outcome. The benchmark Sensex has surged over 8,000 points in just one month despite prevailing concerns over sticky inflation, elevated interest rates, and geopolitical tensions.
The 30-share pack Sensex hit a fresh record high of 80,392.64 on Thursday, July 4. This is 8,314 points higher than the index’s June 4 close of 72,079.05. The Nifty 50 also hit its fresh peak of 24,401 on Thursday.
Year-to-date (till July 3 close), the Sensex has gained nearly 11per cent and the Nifty 50 has risen nearly 12 per cent. The mid and smallcap segments have outperformed as the Nifty Midcap 150 and Nifty Smallcap 250 indices have surged 23 per cent and 25 per cent, respectively.
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This year’s gains in the Indian stock market have been largely driven by solid economic growth, expectations of US Fed rate cuts, hopes for pro-growth government policies, and the prospects of a healthy monsoon. Healthy corporate profitability and political stability at the centre, too, underpin market sentiment.
Experts observe that the last 400-500 point rally in the Nifty 50 is healthy since it has been driven largely by fundamentally strong, high-quality large-cap stocks, including HDFC Bank, ICICI Bank, Axis Bank, Bajaj Finance, Reliance Industries and Bharti Airtel.
“The Indian stock markets have experienced a remarkable surge after the recent election results. This rally can be attributed to several positive factors, including increased participation from domestic institutional investors (DIIs) across different sectors in anticipation of strong upcoming reforms and favourable global market conditions,” Osho Krishan, Senior Analyst – Technical and Derivatives, Angel One, told Mint.
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The market has been influenced by thematic shifts and sectoral rotations, leading to record highs in key indices.
Krishan underscored while this represents one of the most robust market runs in recent history, it’s important to note that technical and derivative indicators suggest an excessively bullish sentiment, indicating a potential need for a period of correction.
“As the market reaps the low-hanging fruits, proactive risk management within the broader market becomes imperative,” Krishan said.
Is the market overheated?
Many experts believe the market has discounted the majority of positives and lacks fresh triggers to sustain gains. Additionally, concerns have been growing over the current valuation.
According to Bloomberg, the Nifty 50’s current price-to-earnings (PE) ratio, a key valuation metric, is slightly above 24 compared to its one-year forward PE of 19. The index’s price-to-book (PB) ratio currently stands at 4 compared to its one-year forward PB of 3.2.
Valuations of mid and smallcap segments are at frothy levels, flashing warning signs.
“The Nifty 50…
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