Equity valuations are once again on the rise after they cooled down in the first half of 2022. The BSE Sensex trailing price-to-earnings (P/E) multiple has risen to a 17-month high of nearly 25x, from 23.7x at the end of December 2022 and 21.6x at the end of June 2022, a report by Business Standard stated.
Similarly, the report also pointed out that the index closed on Friday with a trailing price-to-book (P/B) value ratio of 3.6x, up from 3.4x at the end of December 2022, highest since December 2021.
A steady rise in the valuation has been largely due to higher stock prices, and not because of faster growth in corporate earnings, noted BS. However, it further mentioned that the overall corporate earnings are showing signs of stagnation, against the trend of double-digit earnings growth in 2021 and 2022.
The underlying earnings per share (EPS) of the BSE Sensex on a trailing 12-month basis is up just 3.4 percent in the past 12 months and down nearly 2 percent from the highs made in May this year after the end of the March 2023 quarter earnings season, it informed.
In contrast, the index EPS was up 22.8 percent during the 2022 calendar year and 46.6 percent during 2021, added the report.
It is important to note that the index EPS tracks the combined earnings of the 30 companies that are part of the index and is calculated by dividing the index closing value by its P/E multiple, it noted.
Analysts told the market daily that the apparent stagnation in the overall corporate earnings is due to lower-than-expected corporate profits in the past few quarters, including the April-June 2023 period (Q1FY24).
The report, meanwhile, warned that the growing dichotomy between corporate earnings and rich stock valuations has started to weigh on stock prices. The bull run has entered rough weather after four consecutive months of winning streak. The benchmark BSE Sensex ended in the red in five of the past six trading sessions and was down 2 percent during this period, it said.
The bulls, however, remain hopeful of better earnings growth in the next three-quarters of FY24 and there is no significant cut in full-year earnings estimates and this explains the index's higher valuations despite stagnation in earnings, added the report.
