Stock market crash: Nifty down 9% from peak; PL expects moderate returns from Indian stock market

Stock Market Crash: Indian equity markets faced a sharp correction on Thursday, December 19, with key indices losing over 1 per cent after the US Federal Reserve’s outlook for 2025 rate cuts disappointed investors. While the 25 basis point rate cut announced was in line with expectations, the Fed’s guidance of only two more cuts of 25 basis points each in 2025—against market hopes of three or even four cuts—sparked a sell-off in Wall Street and global indices.

This marks the fourth consecutive session of losses for Indian markets, with the Nifty now over 9 per cent below its record high reached in September. Concerns over stretched valuations and weaker-than-expected earnings growth further weighed on the sentiment.

Domestic brokerage firm Prabhudas Lilladher, in its latest report, shed light on the current transitional phase in Indian markets. It highlighted declining momentum across investment styles, cyclical corrections, and subdued earnings growth as significant contributors to market instability. The report noted that elevated valuations have also amplified concerns among investors.

Market Strategy

Despite these headwinds, Prabhudas Lilladher sees a silver lining for long-term investors as it believes that this phase provides opportunities for stabilisation and potential. While no single style currently dominates the market, the brokerage said the current market environment offers a chance for strategic positioning and careful portfolio realignment.

For long-term investors, Prabhudas Lilladher recommends a pragmatic approach during this period of transition. While near-term volatility is expected, the brokerage suggests focusing on gradual portfolio adjustments, with an emphasis on quality stocks, and maintaining realistic return expectations. 

Key Market Trends

The report identified a uniform decline in investment styles over the past three months, with low volatility and momentum factors each dropping by approximately 6 per cent. Quality investments slightly outperformed Value, although both styles posted declines of 6 per cent and 7 per cent, respectively. This indicates the broader market’s ongoing adjustments as it grapples with cyclical corrections, elevated valuations, and slower-than-expected earnings growth, the brokerage said.

Valuation Insights

According to proprietary quant models by PL Asset Management, the broader equity market appears expensive but not significantly overvalued. Around 50 per cent of stocks are currently trading above their three-year-average price-to-book ratio. The Nifty 50’s trailing price-to-earnings (P/E) ratio stands at 22.6x, aligning closely with its three-year average.

Interestingly, the valuation metrics diverge across market segments. Small-cap and mid-cap indices exhibit trailing P/E ratios of 35.5x and 43.8x, representing premiums of approximately 18 per cent and 32 per cent above their respective three-year averages. This suggests an overheating in smaller segments compared to large-cap stocks, which have faced corrections due to foreign institutional investor (FII) outflows and reallocations toward Chinese equities, noted the brokerage.

As per the brokerage, risk-off sentiment dominated the market in November, as evidenced by marginal declines of 0.31 per cent in the Nifty 50 and BSE Sensex. The subdued performance was driven by concerns over stretched valuations, compounded by weaker Q2 earnings. Notably, Nifty earnings recorded their slowest growth since June 2020, coinciding with India’s GDP growth slowing to 5.4 per cent for the July-September quarter—its weakest pace since Q3 FY23.

This economic slowdown was largely attributed to underwhelming performance in key sectors such as manufacturing and mining. Adding to the bearish sentiment were rising U.S. bond yields and a stronger dollar, which prompted ₹45,974 crore in FII outflows during November.

Market Outlook

Commenting on the market outlook, Siddharth Vora, Head of Quant Investment Strategies and Fund Manager at PL Asset Management, said FII outflows have begun to taper off compared to the ₹115,000 crore seen in October due to global investors increasing their India allocations while reducing exposure to China amid escalating U.S.-China tensions and Donald Trump’s proposed 10 per cent tariffs on Chinese goods.

Vora emphasised that broader markets are likely to remain range-bound in the absence of significant triggers. However, improving consumer sentiment and easing FII outflows could offer short-term relief, he added. 

He advised investors to moderate return expectations, focusing on long-term returns of 12-15 per cent while remaining prepared for potential medium-term volatility.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.