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The benchmark stock market indices Sensex and Nifty extended gains in Tuesday's trading (April 9), clocking new highs. Upbeat macroeconomic data and buoyant retail investors are sending benchmark indices higher.

Yet, as valuations turn punchier, investors would do well to turn their focus to earnings, a crucial driver of long-term stock market returns.

Worryingly, there seems to be a growing gap between investor expectations and headline earnings numbers.

Analyst estimates indicate a moderation in earnings growth in the March 2024 quarter. The aggregate net earnings of the Sensex and the Nifty are projected to grow at the slowest pace in a year in the March quarter, show separate estimates by Kotak Institutional Equities and Motilal Oswal Financial Services.

Adjusted earnings of the BSE 30 index are projected to grow by 5 percent. Net earnings of the Nifty 50 index are estimated to rise by 5-6 percent, sharply slower than the growth in the first nine months of FY24.

The earnings moderation is not just expected to take place at frontline companies. The aggregate net earnings of the companies covered by the above-mentioned brokers and by Jefferies India are not expected to vastly outperform the Nifty index. Earnings at Jefferies India’s coverage universe of 153 companies are projected to grow at the slowest pace in one year.

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The moderation in growth rates at information technology services, oil and gas, metals and mining companies is weighing on earnings expectations.

Perhaps, investor focus is on the broader markets, reflected in the sharp outperformance of the mid cap and small cap stock market indices.

Steady expansion in industrial activity, healthcare, e-commerce and continued focus of the government on infrastructure and defence indigenisation has infused positive momentum into companies in these sectors. Earnings estimates of the Sensex and the Nifty do not reflect the performance of smaller companies.

Preliminary sales updates indicate a mixed picture. Companies in the consumer staples sector are indicating subdued demand conditions. On the other hand, FSN E-Commerce Ventures, which sells products online, indicated healthy growth in the March 2024 quarter. While companies are yet to release their full results, it is important that earnings measure up to investor optimism. Otherwise, the going will get tough for equity returns.


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Technical Picks: L&T, Tata Chemicals, Tata Chemicals, Mazagon Dock and Aluminium (These are published every trading day before markets open and can be read on the app).

R Sree Ram
Moneycontrol Pro