‘Most returns likely in first half of 2024’

livemint.com:

Edited excerpts: Compared to 2017-18, I believe this market cycle is stronger due to robust earnings from midcap and smallcap companies, supported by solid fundamentals. The rally back then seemed more frothy as it was primarily driven by fund flows. This time it is a combination of fund flows and strong fundamentals.

Although it is undeniable that multiples have surged notably in certain segments, it is important to note that not everything is perfectly priced, while some other are clearly expensive. Certain pockets may continue to yield even 20-25% returns, but at an aggregate level, the situation may be different. There could be two or three years where market returns exceed earnings growth substantially.

Though, these trends eventually converge over a longer timeframe, typically five years. For example, with earnings growing at 25%, market returns may reach 40-50% due to multiple expansion. However, in subsequent years, as earnings growth moderates, stock returns could decrease to even 5-10%.

So as earnings growth slows, multiple expansion may halt or even turn into compression. Looking forward however, there is less reason to expect major corrections. It's a common trend that occurs across various sectors.

For instance, consider the tech sector, where we've seen multiple booms, especially post-covid in 2020 and up to the end of 2021. The surge was driven by factors like increased digital adoption and remote work. However, valuations went from one extreme to another, reaching their peak in 2022 before gradually declining.

This pattern is likely to repeat in sectors like industrials as well. Though, it depends on earnings supporting the valuations. Early indicators such as order book builds, and policy changes can