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Business News/ Market / Mark-to-market/  Earnings growth, not higher valuations, will drive markets
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Earnings growth, not higher valuations, will drive markets

Market returns from now on will have to come from an earnings recovery, says Barclays

Naveen Kumar Saini/MintPremium
Naveen Kumar Saini/Mint

The S&P BSE 100 index has rallied around 27% this year, but earnings are yet to catch up, Barclays Equity Research says (see chart). Earnings growth has remained sluggish at around 7%, while the markets have been rallying on hopes of an economic turnaround after the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government came to power. The hope-fuelled rally has meant the expansion in the price-to-earnings (P-E) multiple has accounted for 19% of the total 27% returns since the beginning of 2014 for the gauge.

Market gains depend on earnings, dividends and expansion in the P-E multiple. While stock prices have gone up, earnings have continued to remain lacklustre.

But we may still be in the early stage of a recovery and earnings growth could leap ahead soon, as some analysts maintain. However, in 2003 and 2004, during the initial stages of the last bull run, earnings growth contributed a largish chunk to returns. That hasn’t been the case this time.

Nevertheless, given the recent improvement in industrial production and auto sales data, most analysts expect earnings growth to finally take off this fiscal year. “We expect earnings growth of 15-16% in FY15 (year to March) compared to 12% in FY14, earnings growth is finally picking up after four years of decline for the Nifty companies," says Jitendra Sriram, director and head of research at HSBC Securities and Capital Markets (India) Pvt. Ltd.

Market returns from now on will have to come from an earnings recovery, Barclays says.

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Published: 28 Aug 2014, 10:24 PM IST
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