So long as the music’s playing, investors must get up and dance

livemint.com:

₹21,000 crore invested in May. All this money, the brokerage said, has led to the “water in the pond… reaching higher and higher levels." This refers to all the new money driving stock prices to newer highs. KIE analysts further said that “the pond’s water could be at risk of turning into steam and disappearing altogether," but investors are busy “rolling in the lucre." So, is this an escalation of commitment on KIE’s part in order to defend what it said in September? Or is it just unhappy about how stock prices have continued to rise fast after its bearish call that month? Or is the stock market ‘really’ irrationally exuberant? Any stock brokerage that makes a bold call against the prevailing trend needs to keep defending what it has said.

Now, given that the BSE 500 index, a very broad representation of the overall stock market, has risen by more than 27% from 11 September, when KIE made its call, till last Friday, its recent writings might seem like an escalation of commitment. Nonetheless, the stock market is clearly overvalued. The prices of many stocks are significantly higher than what their current earnings and prospects of future earnings justify.

As this writer has mentioned in the past, in 2024-25, the price-to-book ratio (a valuation measure) of BSE 500 stocks has so far been the highest since 2007-08. Further, a recent news report in Mint quoting data from Prime Database points out that in the first six months of 2024, promoters or owners of businesses have sold stocks worth ₹62,000 crore. This is the highest in the last six years, for which the report shared data, and only half the year has gone by.