Indian Stock Market Faces Deeper Consolidation Amid Weak Q2 Earnings

The Indian stock market is seeing a decline, driven by global concerns, profit-taking at high valuations, and foreign investors pulling out funds. Globally, markets are sending mixed signals due to China’s economic slowdown, ongoing geopolitical tensions, and high inflation. The U.S. Federal Reserve may delay its expected interest rate cut from November to December.

There are growing worries that China’s economic stimulus may not be enough to overcome deeper structural issues. While long-term investors are cautious, short-term traders are more active. If China’s measures begin to show results, investment may pick up, with funds flowing away from India and into China.

Public sector undertaking (PSU) stocks, which performed well in the past two years, have seen significant declines over the past three months. These stocks had risen on optimism but failed to meet execution expectations. A quick recovery for PSU stocks is unlikely in the near term, though they still hold long-term promise due to government initiatives, especially in infrastructure, railways, power, and defense.

In the week ending October 18, Indian markets started with range-bound trading but dropped after weak Q2 earnings. The Nifty 50 fell 1.5%, closing at 24,598, dipping below critical support levels. Some buying in financials, auto, and metals stocks helped stabilize the market by week’s end.

Looking ahead, there are concerns that India may struggle to maintain its high stock market valuation from 2021. Q2 earnings growth has been slower than expected, with a forecasted 4% increase in profit for the Nifty 50. The risk of earnings downgrades looms, and high global inflation is putting pressure on company profit margins.

In the short term, caution is advised, but long-term prospects remain positive, particularly for large-cap stocks in sectors like agriculture, FMCG, consumption, power, and infrastructure. Investors are encouraged to adopt a “buy on dips” strategy.