India’s stock market wears an air of resilience. Since the COVID-19 pandemic trough, benchmark indices—the Nifty 50 and the Sensex—have repeatedly scaled new highs, buoyed by domestic inflows, a swelling army of retail investors and a compelling narrative of long-term growth. Yet, as the indices recently edged past their records, a curious disquiet set in. Many investors found their portfolios stubbornly in the red. Social media buzzed with perplexity. How could markets be at all-time highs while portfolios languished? There are vexing questions around the disconnect between Nifty returns and portfolio returns, between economic growth and earnings growth and, finally, between earnings growth and market returns, and the divergence between them.
Nifty Returns vs Portfolio Returns: The Nifty is a club of giants—banks, financiers, software firms, pharmaceuticals, consumer staples and commodity producers. These are mature, relatively stable businesses. They were never the principal beneficiaries of the recent investment frenzy. The great bull run of 2023 and 2024 was driven instead by small and mid-sized firms riding a wave of government capital expenditure (capex)—railways, roads, urban transport, defence, water, power and green energy. Those companies soared and retail portfolios rose with them.
Since early-2024, however, this massive government spending has slowed. It was first blamed on the general elections, then on the monsoon. Later, geopolitical issues took centre stage—from Trump tariffs to tensions with Pakistan—before the monsoon was blamed once again. Hundreds of companies that had been flying high on government capex have since stagnated or fallen. These are the stocks that dominate retail portfolios. The Nifty, by contrast, barely noticed this and was unaffected. With the exception of Larsen & Toubro, few Nifty heavyweights are direct capex plays. Having risen less during the boom, they corrected less during the slowdown. Comparing the Nifty with a retail portfolio, then, is to mistake apples for oranges.
Economy vs Earnings: A second puzzle is the divergence between India’s nominal gross domestic product (GDP) growth and Nifty earnings. India’s GDP has grown at a compounded annual growth rate (CAGR) of about 10% since 2008. The common belief is that Nifty companies should grow their sales and earnings faster than GDP because these firms are among the country’s largest, benefiting from economies of scale and market dominance. Yet, a recently-released study by Motilal Oswal shows that Nifty earnings per share grew at a CAGR of just 8% between 2008 and 2025. Why the disconnect? For starters, it was imported from the United States, where around 70% of GDP comes from consumption and most of that consumption flows into listed companies as sales. In India, consumption accounts for roughly 62% of GDP and a much smaller share flows into listed consumer companies.
Capex further weakens the link. GDP is boosted by investment booms that barely touch Nifty firms. India has experienced this twice in the past two decades. The first was in the period before and after the global financial crisis. Under two Congress-led regimes, there was a capex boom, but hardly any Nifty companies benefited. Indeed, much of it involved large-scale plunder by crony capitalists and bankers. The second boom was government-led capex between 2022 and 2024 which directly benefited smaller companies but not Nifty constituents, as I have noted earlier.
GDP growth and corporate earnings can diverge for other reasons as well. One is playing out in China which has relied on ferocious competition to build immense manufacturing capacity. This has benefited the nation but not its companies, many of which operate on wafer-thin margins. That is why China’s stock market scarcely reflects its impressive economic growth. Before China, other Asian economies—South Korea, Taiwan and Japan—experienced periods of rapid growth in the latter half of the 20th century, yet earnings growth failed to keep pace.
Earnings vs Market Returns: The third belief is that higher earnings growth will automatically translate into higher market returns. This is the most fallacious of the three, because it assumes that starting and ending valuations do not matter, only earnings do. If starting valuations are low and exit valuations are high, returns will be strong, irrespective of modest earnings growth. At the depth of a bear market in October 2008, the NIFTY stood at around 2,500. By early 2020, it had climbed to roughly 12,000—an annualised return of 15%–16%, excluding dividends—despite earnings growth of just 7% during that period. The reverse is equally true. Starting at high valuations and exiting at lower ones leads to wealth destruction. Taiwan recorded GDP growth of over 5% a year between 1990 and 2008. Yet, its stock market fell by almost 50% over the same period, undone by valuation compression. Japan’s Nikkei delivered negative returns for 34 years from the 1989 peak.
The past three decades have been punctuated by recurring enthusiasm about structural change, new missions, policies and grand projects. For all the exuberance surrounding India’s stock market and economy, the ultimate outcome for investors has been rather pedestrian. The chief culprit is poor earnings growth—a variable that no amount of storytelling can obscure. Corporate profits, once expected to sprint on the back of reforms, consolidation and formalisation, have instead only trudged ahead. That leaves only one other lever to boost returns: low valuations. Yet, even the bulls concede that valuations are not low today. The math is unforgiving. Without stronger profits or cheaper prices, storytelling fails. Will investors update their beliefs?
(This article first appeared in Business Standard newspaper)
Markets discount the future. There's no way of knowing who is right or wrong (and this doesn't matter for the markets doesn't even care for fallacies). It's an amalgamation of all belief systems. It doesn't matter what returns will be (or not be). If someone believes the markets are overvalued, instead of updating the beliefs, just short it or hedge, or simply sell, and take a vacation and sip some Chardonnay. The whole point of the market is to accommodate all kinds of investors with all kinds of beliefs.
After all, a blind monkey a.k.a the S&P outperformed Warren Buffet (aka Berkshire) over the last decade. It makes him look terrible. He never updated his belief system, did he? He's just another grumpy old man.
We all make mistakes.
My advice to folks: Invest in the index, tune out of the market, and enjoy your life, for better or worse.
So, instead of always doubting anything happening as India Inc. and great Indian companies and writing Cassandras, please focus on what is right interpretation of the ongoing and developing economy, like India. Why we want to borrow everything from abroad.
Fully agree on what Adityag has written.
If you don't understand why the Supreme Court (SC) judgement in the Sandesara Case is shocking and a big setback to fair resolution of failed businesses, then the facts of this story should open your eyes.
India’s economy continues to post headline numbers that would make most finance ministers envious. Gross domestic product (GDP) is forecast to grow 7.4% in FY25-26, according to the National Institute of Public Finance and Policy...
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Markets discount the future. There's no way of knowing who is right or wrong (and this doesn't matter for the markets doesn't even care for fallacies). It's an amalgamation of all belief systems. It doesn't matter what returns will be (or not be). If someone believes the markets are overvalued, instead of updating the beliefs, just short it or hedge, or simply sell, and take a vacation and sip some Chardonnay. The whole point of the market is to accommodate all kinds of investors with all kinds of beliefs.
After all, a blind monkey a.k.a the S&P outperformed Warren Buffet (aka Berkshire) over the last decade. It makes him look terrible. He never updated his belief system, did he? He's just another grumpy old man.
We all make mistakes.
My advice to folks: Invest in the index, tune out of the market, and enjoy your life, for better or worse.
Fully agree on what Adityag has written.