Tighten your seat belts! Market may soon land into a turbulent phase as earnings released so far failed to confirm recovery, suggesting valuations might have run ahead of fundamentals. Experts believe stock market investors have already priced in the passage of the GST Bill and good monsoon. On top of it, as many as 32 stocks on BSE 500 have outperformed Sensex by five times year-to-date, another signal that market may have turned overvalued.
A look at top-performing BSE 500 stocks
Data available with database AceEquity suggest that as many as 32 stocks on BSE 500 have returned five times higher than Sensex this calendar.
Stocks of Manappuram Finance, Vedanta, Balrampur Chini and Capital first have rallied up to 175 per cent so far this year, compared to a mere 8 per cent jump in the Sensex.
Experts said that while some of the top-performing BSE500 stocks such as Bajaj Finance have risen on strong fundamentals, rally on others such as Vedanta was sheer news-driven and may not sustain for long.
Manappuram Finance has gained a whopping 173 per cent year to date against just 11 per cent rise in Nifty Financial Services index during the same period. Other NBFC stocks such as Bajaj Finance, Bharat Financial (erstwhile SKS Microfinance) and Capital First have also made smart gains on the BSE.
GST Bill priced in
Experts said that the recent rally on the Sensex was largely driven by hopes of the passage of the GST Bill.
But the market has largely factored it in, they said.
"Currently, the market is factoring in a lot on GST bill passage in the Rajya Sabha. Any disappointment on this front may lead to nearly 5 per cent correction from current levels," said Piyush Garg of ICICI Securities.
Earnings recovery out of sight
June quarter earnings season has also not been impressive. Even IT companies, for whom the Q1 is seasonally stronger, have disappointed Street with their numbers. Private lender Axis Bank, pharma major Dr Reddy's and FMCG firms HUL, ITC also failed to deliver in the June quarter.
The GST may not be as big a cue for the market, as earnings growth is. Unfortunately, that has been missing so far. Slow pick up in earnings growth may only add to valuation concerns.
Market appears expensive
In a report last week, BofA Merrill Lynch Global Research said that the market appears expensive on most metrics of absolute valuations. It said that valuations are high, even as earnings growth forecasts have not changed meaningfully.
The brokerage pointed out that growth for BSE500 stocks slowed to 8 per cent in Q4FY16 from 12 per cent in Q3FY16. For FY17, Bloomberg consensus for NSE benchmark Nifty50 PAT growth has fallen to 17.1 per cent now, from 20 per cent in January, it said.
Piyush Garg of ICICI Securities said that the current rally on the Nifty50 may stall in the range of 8,600-8,900 as valuations look toppish.
"At the current levels, the benchmark indices are trading at nearly 19 times FY17 EPS, which is quite rich as compared to other emerging markets. Hence, the current move may stall in the range of 8,600-8,900. Any further re-rating on earnings only provides for future upward scope," said Garg.