The current market condition reminds me of one of my favorite bedtime stories. I love to narrate this time and again.
Once upon a time a sparrow couple made their nest in a wheat farm. In a few days, the lady sparrow laid four eggs. In two weeks, eggs were fully hatched and four chicks were born. In the meantime, the wheat stems had started growing tall. In another two weeks, the chicks started to fledge and the wheat kernels began to turn golden. This was the day when parent sparrows first discussed leaving their nest and moving somewhere else.
“The crop will soon be ready for the harvest. Our nest shall be exposed and trampled by the harvesters”, the lady sparrow feared. Her companion however was not worried as yet. “Nothing to worry as yet”, he assured her.
In another three weeks, the farm turned completely golden with wheat completely ripe to harvest. The lady sparrow was terribly worried now. “We must fly out now. The chicks have also grown up now and can easily fly to the woods behind the hill”, she argued with her companion. “Nothing to worry about yet. We have plenty of food here. Let chicks eat good and become strong”, the companion remained nonchalant.
In a couple of days, the farmer came to the farm with his wife. He looked at the ripe crop with pride and said, “we shall now call my brothers and begin harvesting the crop from tomorrow”. They soon left the farm. The lady sparrow was terribly frightened now. "Must fly out right now”, she coaxed his companion and chicks. “Nothing to worry for now”, the companion quipped, playing with the chicks.
After a couple of days, the farmer again came to the farm with his wife. “My brothers are all thankless and selfish”, he said annoyingly. I would help them whenever they need, but they have refused to help me in harvesting. I shall now call all my neighbors and begin harvesting from tomorrow. “I beg you please let’s fly out now”, the lady sparrow pleaded with the family. The children had become strong and comfortable in the farm by now. “Not yet”. The companion reiterated. The children agreed.
One more week passed, nothing happened. One day the farmer and his wife again came to the farm. He saw that the wheat kernels were beginning to wither now. The golden crop had developed many black spots. “We live in a world full of selfish and thankless people. We cannot count on anyone for help”, he said furiously to his wife. “Let’s buy our own tools and begin harvesting ourselves from tomorrow”, the farmer said resolutely. “Hey guys let’s get ready, it’s time to fly out”, the sparrow told his companion and children, with a sense of urgency. “What happened now” the lady asked. “Farmer have realized that no one helps those who do not help themselves”. He will definitely come tomorrow and begin harvesting, the companion explained.
In the past three years there have been many instances that made investors nervous about markets. The Russian invasion of Ukraine; ruling BJP reduced to a minority in the Lok Sabha elections, escalation of hostilities between forces of Israel and Palestine, Lebanon, Syria, Iran etc. All these instances raised the specter of a deeper market correction, provoking investors to lighten their equity exposure. The market however continued to belie their apprehensions, and continued to climb higher, simply because earnings were supporting. Now, for the first time in the past 3 years, earnings are showing fatigue and are expected to grow in single digit in FY25, with decline in margins. This is the time investors need to review their equity exposure and take corrective action.
As per the current estimates, FY25E NIFTY50 EPS is expected to grow ~8% (vs over 18% each for FY23 and FY24). FY26E estimates are presently hovering around ~15% growth but may see further downgrades.
In my view, earnings growth with margin improvement is the only sustainable factor for rise in stock prices. Rest all factors may add to the momentum, which if not supported by earnings growth, inevitably fizzles out in due course.
