The Nifty has run up a bit, but how high is it in terms of an earnings multiple? And how do returns look from here?

If you look at a Price to Earnings Ratio (P/E) independent of anything else, it’s not very useful – because the earnings growth might actually be spectacularly high, or expected to be. But at some point, the P/E becomes useful even as a number – when it’s too high relative to its own history, it might just be a bubble building up.

The Nifty is now at a P/E of 23. This is high, but still below highs of 2015/16 where we saw it beyond 24. If, in the past, you had bought the Nifty when it was at a P/E of 23, then you would see:

  • Average 1 year returns of -10%
  • Average 3 year returns of -1.89% (annualized)
  • Average 5 year returns of 6.94% (annualized)
  • Average 7 year returns of 12.12% (annualized)
  • Average 10 year returns of 13.44% (annualized)

The longer term returns have little data though, since we only have P/E data since 1999, so it’s really been one earnings cycle.

Here’s how returns have been if you invested at different P/E multiples, on average:

Nifty PE

Earnings growth as a whole is up just 2.6% but the cycle seems to be turning.

If we look at Q3 alone, the Nifty companies saw a 17% increase in aggregate profit! (Mostly due to a low base and the oil companies turning a profit, but still)

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The market’s a little hot and it’s not exactly the best time to sell your neighbour’s house and invest. But it’s not super-highly valued either. A further increase in P/E, though, will probably make return probabilities reduce much more.

In Capitalmind Premium, we did this analysis with more indexes to see where the broader market P/E is, and how bubbly we seem to be. Do sign up! Use code CM2017 to get a 10% discount. 


  1. Removing Idea and BHEL and replacing them with IBHF and IOC will reduce the Nifty PE to some extent from April !!

  2. it is better to consider rolling averages and also see in terms of standard deviations which gives much better idea on whether how bad things are stretched

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