Earnings growth remains fundamental predictor of stock price performance: Buoyant Capital's Jigar Mistry

Mistry noted that in the shorter term, technical factors help. But over longer periods, if the earnings growth doesn’t come through, "then you sort of have a bit of a problem on your hands".

Buoyant Capital's Jigar Mistry, during a conversation with Moneycontrol's The Wealth Formula podcast, noted that while short-term market moves may be influenced by technical factors and liquidity flows, the true driver of stock performance over time remains earnings growth.

“You might want to have a fun ride now and again basis flows, but those don't often end in a positive. That is the eternal truth  in markets," he said.

Mistry noted that in the shorter term, technical factors help. But over longer periods, if the earnings growth doesn’t come through, "then you sort of have a bit of a problem on your hands".

He explained that one of the largest learnings he had in the last year was that while one might want to think that because you can explain away a few performances based on short-term issues, the bigger lessons are learned when you break down the fundamental aspects of things. According to Mistry, longer-term data consistently supports this idea. “If I take, say, a five- or ten-year rolling return, then the EPS growth and share price growth have always aligned,” he said.

Reflecting on past trends, Mistry pointed out that in September 2024, the three-year CAGR for the small-cap index was almost twice that of its earnings growth — a signal that valuations had stretched beyond fundamentals.

“At that time, the argument was simple. If the domestics are going to power the small and micro caps, and the foreign investors are powering large and mid caps, then FIIs leaving and domestics continuing to pump more money would mean small and mid caps won’t crack as much as large caps," he said.

However, the correction that followed between September and December 2024 proved otherwise. When the market’s relentless pressure continued at its worst, the small-cap index corrected 25% compared to a 9% drop in the BSE 500. “That tells you that eventually, you can make up all these theories and narratives, but the true fundamental predictor of the market is the fact that your earnings need to come through, your cash flows need to come through," he explained.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.