The Nifty has fallen a little – about 8% off in two months. But, in general, the valuations still remain rich. Using standalone price to earnings ratios, the Nifty’s P/E ratio is still above 20, while earnings growth languishes.
Earnings growth is still negative – and if you took consolidated results it would show you that aggregate earnings fell 8% from a year ago.
Even the broad market remains overvalued. The Nifty 500 P/E is still nearly 25, but earnings growth has been dismal. Earnings for the Nifty 500 have contracted for every quarter since Jun 2015.
The Impact: Are We Still Nuts?
With the demonetization impact ahead of us, earnings are quite likely to contract. They have contracted even earlier. So earnings will fall even more. That does not augur well for a market that is so hugely overvalued.
At some point this kind of valuation poses a threat – because it can’t sustain here this long. We’ve had too many quarters of high expectations and continued earnings contractions. Just a note: beware.