Stock market: Fight against valuations and risks

Stock markets appear expensive on most traditional valuation metrics, trading at a significant premium over long-term averages. The larger small cap market looks more overvalued. It comes even as significant risks lurk – rising inflation, an earlier-than-expected rise in U.S. interest rates, and a pandemic that stays one step ahead. Can the market break through this wall of worry or will any of these events trigger a sell off?

However, the bond earnings-to-yield ratio is below its long-term average on an ongoing basis, which supports current market valuations as bond yields have stood at around 6%. Any pick-up in inflation can lead to higher bond yields. Going forward, the overall market performance is expected to be in line with global trends until evidence of medium-term earnings acceleration begins to emerge, analysts say.

  • Clever EPS consensus estimate for FY22 remains largely unchanged
  • Bond earnings / yield ratio is below its long-term average on a rolling basis
  • Rapid vaccination is expected in early July, reducing the risk of containment
  • Inflation may be due to supply disruptions and eventually cool down

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  • US interest rate normalization and Fed tapering could cap inflows
  • There could even be exits if US rates rise
  • India’s interest rates could rise faster as inflation tightens
  • Higher bond yields and stronger dollars will drag markets
  • A third wave of Covid


  • Many segments are trading at normal valuations
  • Income is lower than normal; as they increase, overvaluation will correct

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