Stock market: Valuation froth? 38% BSE200 stock trading above 5-year average multiples

The 10 per cent Nifty rally from the April bottom has plucked out valuation comfort from the market, Emkay Global said on Monday, saying 38 per cent of the BSE200 stocks are now trading above the 5-year long-tern average (LTA) valuations against 12 per cent on April 9, showing some valuation froth in the broader market universe. 

The Nifty is trading at 20.9 times 1-year forward PER – just below the LTA, although small and midcap (SMID) indices are trading above their 5-year LTA. 

“We are convinced that SMID PER premiums to large-caps are supported by superior composition, higher growth, and improving balance sheet metrics, though investors should nevertheless be selective when valuations cross the 5Y LTA,” Emkay Global said. 

Stock market to take pause

On Monday, benchmark stock indices Sensex and Nifty edged lower after rising for four-straight days. The BSE Sensex was trading at 83,812.16, down 246.74 points or 0.29 per cent. Nifty stood at 25,573.75, down 64.05points or 0.25 per cent.

Emkay Global said the stock market is likely to pause for breath after a frenetic 10 per cent rally since the tariff pause announcement on April 9. 

Valuation comfort has largely eroded, it said adding that it is not much worried from a medium-term perspective. The crude price spike is likely to be transient and India’s fundamentals are otherwise looking up, the domestic brokerage said.

From a 1-2-year perspective, it sees SMIDs offering better opportunities than large caps, partly because Emkay is negative on financials and staples, which have a heavy weightage in the large-cap universe.

“We see an earnings recovery on the back of aggressive RBI easing and weak commodity prices. Our sector preferences are unchanged and we are positive on Discretionary, Technology, and Materials, and UW on Financials and Staples. Our weekly product returns in a new avatar – a changed title and a new cycle of weekend publication,” the brokerage said.

India outlook intact
Emkay said its fundamental thesis on Indian markets is unchanged as of now, and that it will revisit it if crude prices remail elevated for 2-3 months. 

Sectors that are vulnerable to a sustained crude spike (not our base case): oil marketing companies, autos, and staples. Selectively, some pharma API manufacturers and chemical companies could also see RM pressures, Emkay Global said said.

Emkay Global said earnings have held up through the latter half of the earnings season. The FY26 Nifty EPS (Bloomberg consensus) fell 3 per cent in 1QFY26, and Emkay estimates have been stable at Rs 1,128. 

“The breadth also improved and the share of stocks (from a 504-stock universe of 5+ analyst coverage) with over 10 per cent EPS cuts fell, from 49 per cent in 4QFY25 to 22 per cent in 1QFY25. We believe that we are at the bottom of the earnings downgrade cycle and see a possibility of upgrades,” Emkay Global said. 

The positive impact of the RBI easing and margin benefits from weak commodity prices are not captured in the FY26 forecasts, it added.

“As the US economy slows, we expect elevated emerging market flows and India should stand out due to the cyclical recovery in the economy in 2HFY26. The elevated valuations also pose a near-term risk to FPI flows. We have seen no worrying signs from a supply perspective, IPOs and QIPs have remained muted albeit are showing early signs of a pick-up,” Emkay Global said.