Markets at All-Time Highs!! Is it time to sell?

The new highs in the market have brought up the debate again: Are these levels sustainable?

"We believe markets could be range bound in the near term, but over the long run, it may follow the earnings growth trajectory." Anand Shah, Head - PMS & AIF Investments, ICICI Prudential AMC Ltd.

Is this the beginning of a new bull run? And a more pertinent question, is this time to sell? Being student of market took us back to October 2021, when Mr. Market hit a new high. While the market values are at a new high, valuations are far lower than what they were in October 2021 as absolute earnings growth rate is strong across Large caps, Midcap and small caps, see Exhibit 1.

Since October 2021, earnings have recovered, and the market has rewarded top 500 companies by market capitalization, which showed significant improvement in their Return on Equity (ROES). These companies that achieved earnings growth, maintained reasonable valuations, and lastly where earnings upgrade materialized, have been duly rewarded by the market.

More importantly, it is pertinent to note, that while the market prices are at a new high, valuations are not. This can be clearly seen in Exhibit 1. Earnings is one of the important factor that has been the key driver for stock price. Valuations on the other hand have eased due to the staggering rise in earnings from the previous peak.

The key question here, is that from here on, is the earnings growth sustainable to demand a further upside? Given the trajectory of earnings over the past couple of years, earnings momentum may ease on a consolidated basis. Thus, as we stand, markets are neither cheap or very expensive. Going ahead, we believe markets could be range bound in the near term, but over the long run, it may follow the earnings growth trajectory.

One should also take cognizance of the fact that earnings have not grown uniformly across sectors or even market caps from October 2021 to June 2023.