Analyst Tracker: Markets losing steam after July rally, moderate Q1 earnings; investors cautious on valuation

Analysts are cautious on Indian markets amid high valuations, modest earnings growth, global headwinds and geopolitical uncertainties.

After hitting a series of new highs in June 2024, the benchmark indices continued to roar in July.

The Nifty 50 stopped just a whisker short of the 25,000-mark in July, but topped it over the next couple of days into August. It made a lifetime high of 25,078 on August 1.

A notable feature of the rally from 24,000 to 25,000 was sector rotation. Diverse baskets of stocks took turns to contribute to the Nifty gains during the month.

Since then, the indices seem to have lost some steam, not to mention the body blow from the crash of the Japanese and the US markets.

While till July, most of the market dips were swiftly bought into, in August, the benchmark indices are seen struggling to hold any meaningful rise.

Also read | TCS, HCLTech most upgraded IT stocks; brokerages optimistic on long-term recovery

Analysts are sounding cautious, given the high valuations, modest earnings growth, global headwinds and geopolitical uncertainties.

Nifty's valuations are high and Q1 FY25 earnings, while mostly meeting expectations, haven’t been stellar enough to continue providing support. Nifty’s trailing P/E of 24 is above the 10-year average of 22.04. Earnings growth, on the other hand, is projected at a modest 12.5 percent for FY25 -- down from 19 percent in FY24.

Vinit Sambre, Head of Equities at DSP Mutual Fund, this week said that corporate earnings are cooling off after a two-year sprint.

Sunil Singhania, founder, Abakkus Asset Manager, also advised caution. “There is some weakness – money-making had become too easy,” he said, referring to the latest correction.

While market experts are not in panic mode, the caution shows in Moneycontrol’s Analysts’ Call Tracker for July. The banking sector, which had previously dominated the list of stocks with maximum optimism, has lost some grip.

Banking heavyweights hit by brokerage downgrades

HDFC Bank and Axis Bank, both high-flying stocks earlier, have seen notable downgrades. For Axis Bank, higher credit costs weighed on profitability, and brokerages expect only a moderate loan growth in the near term.

Also read | Axis Bank, HDFC Bank among most downgraded Nifty stocks in July

For HDFC Bank, analysts expect that a focus on improving deposits will likely keep loan growth in check in the near term.

Both the banking stocks gave way to companies like Larsen & Toubro and Mahindra & Mahindra. Shriram Finance remains at the top of the optimism list, reflecting its continued strong performance.

In contrast, the information technology sector continues to face significant pessimism. Sentiment has improved slightly now. Wipro maintains its position at the top of the list of stocks with maximum pessimism.

Infosys Q1 results impress, but analysts have other concerns

Infosys, which has seen a marked improvement in the outlook over the past one year, has lost some analyst confidence in the last one month. IT bellwether Infosys is on the list of both maximum quarterly and monthly downgrades, thanks to the downgrades in the last one month.

The looming threat of a global recession, combined with rising subcontracting costs, and cross-currency headwinds, has cast a shadow over Infosys's operating margins, despite reporting positive financial results for the April-June quarter.

FMCG major Nestle and pharma giants Dr Reddy’s and Divi’s Labs have also appeared frequently on the list of maximum pessimism.

Shriram Finance and SBI Life Insurance feature prominently among the stocks with significant positive revisions. Quarterly updates highlight that Kotak Mahindra Bank and SBI Life Insurance have undergone substantial upgrades, signalling improved investor confidence. Conversely, Titan and Sun Pharma are under increased scrutiny, leading the list of maximum quarterly downgrades.

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