Is the Indian Stock Market in a Bubble?

 One of the biggest questions within the minds of Indian investors and global is "Is Indian Markets Overvalued"?.  More than that what makes the F/O grow so much despite investors losing money? The Psychology of investments makes the investors invest in F/O rather than just quick money and gains. The stock price, valuation metrics, and financial jargon are still like French and Greek words for 90% of the investors.  Most investors have joined the market getting inspiration from friends and families and lastly from financial influencers.

  Most of the large-cap companies and few midcaps’ stock prices have become so high that a simple investor who does not understand the financial metrics of valuation and is overvalued will search for stocks of Rs 100 or below to make wealth. This is another reason why small caps and micro caps have gained so much.

 A common investor who has limited savings also dreams of investing in the stock market but fails to buy Reliance or Adani stocks or any stocks that are above Rs 500 since he has limited money. These investors choose stocks just like they choose foods in a restaurant based on the price tag of the food.  Hence for these investors options with low prices is the best option. For these 1sttime investors investing in stocks is the big factor where that family never made any investments in stocks. For this generation, it’s a matter of proving to their family that by borrowing capital from or by investing their own capital, these investors want to prove their ability of Smartphone knowledge to their family.

Now many will say that a Mutual fund is the best way to invest when one has a limited corpus and does not have much knowledge about investments. In a similar fashion Mutual Fund sip has become popular but failed to educate that out of Rs 23000 cr SIP, only 20% are the net SIP.   The reason for this is that the Patience factor has dropped significantly among investors who 1st investors not only for themselves but for their families. They are 1st generation who are doing investments in the Indian stock market shifting from traditional old investors.

Now coming to the Topic of the Insight. The answer isn’t straightforward. While the Nifty 50 appears reasonably valued, the Nifty Midcap 150 index raises concerns. Here's a breakdown based on PE ratios:

  1. Nifty 50 Valuations

   Current PE Ratio: 22.44

   Historical Comparison:

    20-Year Median: 21.35

    15-Year Median: 22.37

    10-Year Median: 23.43

    5-Year Median: 23.15

 The Nifty 50's current PE is close to its long-term medians, indicating it isn’t significantly overvalued. Even when considering future earnings, the forward PE remains below the long-term median, suggesting the index is not overheated.

  2. Nifty Midcap 150 Valuations

   Current PE Ratio: 43.14

   5-Year Median PE: 27.25

 The Midcap index's current PE is about 58% higher than its 5-year median, signaling potential overvaluation. This spike in PE is due to a downturn in earnings despite a 17% increase in the index since April 2024. Even with optimistic future earnings growth, the forward PE remains significantly above its historical median, indicating that the midcap segment is in overvalued territory.

  3. Nifty Smallcap 250 Valuations

   Current PE Ratio: 30.57

   5-Year Median PE: 29.21

  The Smallcap index shows a slight overvaluation compared to its 5-year median. However, it is not as overheated as the Midcap index. This stability is attributed to steady earnings growth, which has kept the valuations from stretching too far.

  Conclusion

• Large-cap (Nifty 50): Not overvalued, with valuations aligning closely with historical medians.
• Mid-cap (Nifty Midcap 150): Significantly overvalued, driven by a decline in earnings and rising index levels.
• Small-cap (Nifty Smallcap 250): Slightly overvalued but not as extreme as midcaps.

In summary, while the broader market represented by Nifty 50 isn’t in a bubble, caution is warranted with midcaps, which appear significantly overvalued. But again coming back to the place from where I started investing is now a matter of proving to the family which never made any investment in stocks. The growth of the Demat account is unstoppable until the Indian markets witness a major correction or consolidation just like in 2018 or 2011-2013.