Dear Reader,

A popular trading philosophy is to buy on rumours and sell on confirmation. If we scour through past market cycles, short or long, we can find innumerable moments where indices run up ahead of quarterly earnings and then just dissipate once the report cards pour in. That does not mean companies always under-deliver on profitability, but it simply shows that markets love hope. Being wrong is better than being left out.

The present day scenario is not different. India’s twin stock indices have scaled new peaks, running on the dope of hope that companies will report another quarter of robust profitability. Nifty has already crossed the year-end target of two brokerages. Of course, there will be a bunch of laggards that are on the ebb of the cycle and there will be shining stars, as is the case in every quarter. This season is about the final quarter that will close the curtains on the annual performance in FY24.

Ananya Roy brings us a sensible explanation on what to expect this earnings season. “Overall, India Inc is expected to report sales growth in the mid-single digits, while bottom-line growth is expected to be slightly higher,” she points out in her piece.

That does not sound upbeat enough to warrant the kind of outperformance showed by the equity indices over the past two months. Analysts aren’t as upbeat as investors on earnings. As my colleague R Sreeram pointed out on Tuesday, earnings moderation is expected across companies and not just the bigwigs.

Chances are that the current rally could dim a little once the numbers start to trickle in. The sectors that could spell trouble are those that depend on global markets such as IT, auto ancillaries, textiles, and agrochemicals. The proof of the IT pudding would be served today as bellwether TCS details its performance. Any misgivings on the future guidance from these could make investors run faster towards exit.

Among those that are expected to shine are consumer electricals as climate change makes air conditioners a hot commodity during punishing summers. Engineering, defence and industrials too will show a strong footing riding on the capex narrative. Finally, banks are expected to report a fitting closure to a sparkling fiscal year of robust asset quality and loan growth.

Here too, we can see some holes. Consumer electricals are riding on a cyclical upswing which means they could face pressure in the current financial year. Capex-driven companies are justified in the bullish sentiment that surrounds them, but private capex is still soft in pockets. Banks have capped a good year, lending to every business that came to their doorstep and even sometimes shrinking the pricing of loans as our Chart of the Day details. That does not mean lenders are going to report blockbuster numbers. Analysts at Kotak Institutional Equities reckon that core earnings growth would be low and the struggle for deposits is continuing.

That begs the question, why are investors so upbeat? Is this bullishness a voluntary delusion further fanned by the fumes of electoral polls or is it much more than that?

A lot of the factors that are making Indian indices seek crazy valuations is resting on one big expectation: the US Federal Reserve’s rate cuts. What began as a foregone conclusion that the Fed would cut rates six times this year has now withered away into a feeble hope of just one cut, perhaps in November. Jamie Dimon, JPMorgan Chase’s chief executive, has made a prescient point on US inflation and rates in his annual letter to shareholders. This Financial Times article, free to read for Moneycontrol Pro subscribers, details Dimon’s view that there is very little possibility of the Fed cutting rates.


What happens to India’s enthusiastic stock market investors? While the earnings reality check is on the way, the delusion of Fed rate cuts will only unravel slowly as progressive data swings the markets everywhere.Investing insights from our research team

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Technical Picks: ITC, TCS, HPCL, IDFC First Bank and Natural gas (These are published every trading day before markets open and can be read on the app). Aparna Iyer
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