Should you buy this market fall? One reason to be fearful, many not to be greedy

Should you seize this dip as a buying opportunity or retreat to the sidelines?

The markets have taken a nosedive today, courtesy of a potent mix of factors, with the HMPV virus scare leading the charge. The Sensex is down by 1,200 points, and the Nifty isn’t far behind, but the real carnage lies in the mid- and small-cap space. This steep fall—reminiscent of January 2020, when whispers of the coronavirus started sending shockwaves—raises the eternal investor dilemma: Should you seize this dip as a buying opportunity or retreat to the sidelines?

Let’s break it down using a sensible lens: there’s one solid reason to stay fearful (cautious) and plenty of reasons not to get carried away with greed. The golden rule? Don’t rush—stagger your buys, and keep your wits about you.

The one reason to be fearful
Earnings growth: Down, but not out?
Brace yourself—earnings growth this fiscal is on shaky ground. Analysts expect a mere 5% rise for the fiscal, with Q2 delivering a barrage of downgrades. Q3 could be déjà vu, or worse. The real kicker? Disappointment isn’t just about companies missing their marks—it’s also about analysts consistently overestimating. Either way, markets are brutal, and earnings disappointments tend to trigger outsized sell-offs.

Three reasons not to be greedy

1. The HMPV Virus: The joker in the pack
Sure, the virus is the headline grabber today, but let’s not jump the gun. Nobody can predict how this will unfold, and making knee-jerk decisions isn’t the wisest play. Markets hate uncertainty, and if things escalate, investors will likely hit pause, withdraw funds, or avoid deploying new money. The downside risk? Considerable.

2. Valuations: A tightrope act
Valuations by themselves are like a tightrope—steady as long as earnings growth keeps the balance. For the past four years, stock prices soared on the back of spectacular earnings growth. But now? Despite the recent dip, markets are still strutting along the higher end of the valuations curve, leaving little room for a re-rating of multiples. The outcomes? Best case: Stocks hitch a ride with earnings growth if expectations are met.

Likely case: Stocks stall on a flatline, tracking earnings as is.

Worst case: Stocks fall, with de-rating smacking them if expectations disappoint.

Here’s the kicker: According to Bloomberg data, out of 433 stocks from the NSE 500 for which earnings estimates for FY26 are available, a staggering 273 stocks are trading at P/E multiples north of 25x FY26 earnings, while another 85 are hovering between 15-25x. High valuations can turn into high risks, especially when the safety net of earnings growth starts to fray.

3. FII Firepower: The vanishing act

The evidence is clear—foreign institutional investor (FII) selling isn’t showing signs of slowing down. While several theories suggest that the sell-off might be nearing its end, the numbers tell a different story. FIIs’ collective stake has dropped to 16.1%, from 18.88 in March 2023 and 20.95 in March 2021. But this doesn’t create the necessary condition for them to make a comeback just yet. A big reason for the selling spree is better US returns and a strong dollar—both persistent hurdles. On the other hand, the reason new money hasn’t come in is elevated valuations. And if earnings growth slows down, a fall in stock prices won’t make valuations lower. So, the odds of fresh FII inflows remain slim.

Two balancing acts

4. Domestic Liquidity: The biggest driving force in the stock markets has been domestic investors. This continues to grow at a healthy pace, with monthly inflows of Rs 25,000 crore consistently supporting the markets. It’s unlikely that this inflow will stop, but private investors and family offices, which have seen significant rises in their portfolios, are leaning towards trimming their holdings rather than committing additional capital.

5. Trump Worries: There is a big unknown in how the Trump regime will impact the markets. The Indian economy isn’t exposed too much to this since it is still largely driven by domestic growth. However, if we look at stocks, a lot of optimism is tied to stories benefiting from favourable global trade, including the China-plus-one strategy and other export driven sectors. The fears of large-scale business disruptions may be overstated, but what is likely not overstated—and could have a bigger impact on markets—is how US Treasuries will react to Trump’s policies. The possibility of higher inflation due to loose fiscal policy and protectionism is real, and rising US bond yields pose a significant threat to global equity markets. Ironically, during periods of market nervousness, global investors flock to the dollar, which could exacerbate foreign selling further.

Bottomline
Buy-on-dip has worked great so far. But wait and watch may be a better trade this time. Remember, fear isn’t the enemy, nor is greed your best friend. To stay in the game, it’s best to take a staggered approach.