Indian Stock Market: Nifty 50 Falls Nearly 3% from Its All-Time High

Indian Stock Market: Following Thursday’s decline, the Nifty 50 is now approximately 3% below its all-time high of 24,854.80 reached on July 19.

On Thursday, July 25, the Indian stock market experienced a notable selloff during the morning session, with benchmark indices Sensex and Nifty 50 each dropping nearly 1%. Both indices have been declining for the past five consecutive sessions. At today’s low, the Nifty 50 is approximately 3% below its all-time high of 24,854.80, reached on July 19.

The market’s immediate negative triggers appear to be weak global cues and budgetary proposals to increase taxes on long-term and short-term capital gains (LTCG and STCG). While global uncertainties may persist, concerns over capital gains taxes are expected to ease soon.

However, several significant concerns could lead to a deeper market correction.

Here are five critical factors that could trigger a correction of up to 10% or more in the Indian market:

Overheated Market

Valuation concerns are prevalent across various market segments. While mid and small-cap stocks may be trading at excessive levels, large-cap stocks are also trading at a premium.

Key valuation metrics for the Nifty 50 are showing signs of strain. According to Bloomberg data, the current price-to-earnings (PE) ratio of the Nifty 50 stands at 24.5, which is above its one-year forward PE ratio of 19.2. Additionally, the price-to-book (PB) value of the Nifty 50 is at 4, exceeding its one-year forward PB value of 3.2.

Pankaj Pandey, Head of Research at ICICI Securities, told Mint, ‘Valuation challenges are evident across different market caps. Elevated valuations are partly due to the renewed confidence in the sustainability of growth rates after a long period of uncertainty.

Unimpressive Q1 Numbers

Corporate earnings in India for the April-June quarter (Q1FY25) have been mixed and have not significantly improved market sentiment.

Experts note that the recent market rally has been fueled by strong corporate earnings, but this momentum appears to be slowing. This trend could undermine the sustainability of the market’s gains.

V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, remarked, “The Indian stock market rally has been driven by earnings growth. The latest Economic Survey shows that corporate earnings grew by 30% in FY24, and Nifty earnings increased by 24%. However, Q1 earnings so far suggest a slowdown in corporate performance.

Vijayakumar stated, ‘After the impressive 24% growth in Nifty earnings for FY24, there are signs of deceleration in corporate earnings. The high valuations in some broader market segments are unlikely to be maintained, despite the current irrational exuberance among retail investors.

Lack of Fresh Positive Triggers

The market appears to have priced in most of the recent catalysts. With the elections and Budget now behind us, finding new drivers to sustain and extend gains has become challenging. Experts suggest that the absence of fresh triggers could lead to increased stock and sector-specific movements, with potential periods of profit-taking at higher levels.

Uncertainty Over Interest Rate Cuts

Uncertainty regarding US interest rate cuts continues to impact market sentiment. Fed Chair Jerome Powell has emphasized that the Federal Reserve will base its decisions on data.

A recent Reuters poll of economists suggests that the Fed may implement two rate cuts this year—one in September and another in December. While easing inflation could prompt the Fed to lower rates, the central bank must also consider the ongoing strength of US consumer demand.

US Presidential Election

The upcoming US Presidential Election is a significant factor that could influence global market sentiment.

The uncertainty surrounding the election outcome may lead to increased market volatility in the short term. If former President Donald Trump were to return to power, his potential to impose new tariffs or increase existing ones could adversely affect the global economy and markets.

Vijayakumar commented, “The uncertainty surrounding the US presidential election is likely to impact the market significantly. This is potentially the biggest negative trigger for economies and markets worldwide. With Donald Trump’s presidency becoming a more plausible scenario, the risk of a global trade war could escalate, affecting global economies and markets.

Time to Be Concerned?

Experts believe it’s too soon to determine if a significant market correction is underway.

Vijayakumar noted, “It’s premature to conclude that a correction phase has begun for the Nifty 50. Historically, dips during this rally, which started in April 2020, have often been buying opportunities. We’ve seen similar dips before, and they have typically turned into opportunities for investment.”

He highlighted that while there is froth in the broader market, driven by fund flows into mid- and small-cap stocks and the irrational exuberance of retail investors, a correction could be beneficial.

“A correction would be healthy for the market. We haven’t experienced a 5% correction recently. True corrections often arise from unforeseen factors, including potential black swan events or new geopolitical tensions,” Vijayakumar added.

Pandey and Athawale on Market Corrections

Pandey noted that corrections of 5-10% are typical and can occur multiple times throughout the year.

“We don’t see anything unusual about the recent corrections. Domestically, we don’t anticipate many negative triggers that could lead to a correction of over 10%. However, global uncertainty remains a concern,” Pandey said.

“With upcoming US elections and market volatility in the US, global factors may introduce additional volatility. While domestic triggers may be absorbed, a correction beyond 5% could present new buying opportunities, as the underlying structural positives remain strong,” he added.

Amol Athawale, VP of Technical Research at Kotak Securities, observed that the Nifty 50 has faced consistent selling pressure at higher levels this week. The index’s intraday charts show a lower top formation, indicating weak sentiment that may persist in the near term.

“Despite this, the medium-term technical outlook remains positive. For short-term traders, the 20-day SMA (simple moving average) at 24,300 will be a key level. If the index remains below this mark, weak sentiment is likely to continue, and the market may retest the 24,150-24,100 range,” Athawale said.

“Positional traders might consider long positions between 24,200 and 24,100, with a stop loss at 24,000. Conversely, if the index rises above 24,300, it could bounce back to 24,500 and possibly advance to 24,650. A close below 24,000 could signal further weakness, potentially pushing the market down to 23,500,” he added.