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Why We Believe Indian Markets Are Expensive


If you just look at the index levels, it might seem like the rally still has legs. But dig into the underlying numbers, and a different story emerges. The signals from corporate earnings, valuations, and historical return patterns all suggest caution.

1. Corporate Sales Growth Has Stalled

Earnings growth comes from two levers: selling more (volume growth) or selling at higher margins. Margins in India are already near lifetime highs, but sales growth is soft.

  • FY25 revenue growth for many sectors is well below historical averages.

  • Pre-COVID, sectors like Construction, Capital Goods, and Power routinely saw double-digit sales growth. Now, they’re mostly in single digits.

  • This means profit growth will struggle unless margins somehow expand further — which is unlikely at current levels.

In short, the economy isn’t firing on all cylinders, and corporate India isn’t seeing the broad-based top-line growth that usually supports a bull market.

2. Valuations Are at Bull-Market Extremes

The Nifty Price-to-Peak Earnings (PPE) ratio is at +1 standard deviation above its long-term average, a level similar to previous market peaks. Historically, these valuation levels have preceded either:

  • Time corrections: prices go sideways while earnings catch up, or

  • Price corrections: sharp declines to bring valuations back in line.

Either way, upside from here looks limited unless earnings growth accelerates — and the sales numbers suggest that’s unlikely.

3. Disconnect Between Prices and Earnings Growth

The Nifty 500’s median forward P/E ratio is ~41x. Median earnings growth? Just 9% YoY. That’s a mismatch.
High valuations with modest growth tilt the risk-reward in favour of sellers. Small- and mid-cap stocks look even more stretched, with high earnings expectations in a slowing domestic economy.

4. India’s Earnings Yield Is Near Record Lows

India’s current earnings yield is about 4.1% — placing it in the 96th percentile of historical valuations. This means investors are paying a historically high price for each unit of earnings. While India’s ROE is relatively healthy at ~15%, it’s not enough to justify such a low yield unless growth meaningfully accelerates.

5. History Shows High Valuations Mean Lower Future Returns

Looking at past market cycles, periods of high equity returns are almost always followed by phases of weak or negative returns.

  • The Sensex has delivered spectacular gains in some upcycles (33% CAGR from 1979–92, 49% CAGR from 2002–08), but those were followed by multi-year stretches of underperformance.

  • Right now, we are coming off a strong four-year run (32% CAGR since 2020). History suggests the odds of another such streak are slim.

Bottom Line

Markets aren’t cheap. Corporate sales growth is sluggish, valuations are stretched, earnings yields are near record lows, and historical patterns point to muted forward returns. That doesn’t mean a crash is imminent — but it does mean investors should temper expectations, focus on quality, and avoid overpaying for growth that may not materialize.

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