On the cusp of Samvat 2081, a sense of unease hangs over the markets. After navigating a series of global challenges with remarkable resilience, the bullish spirit appears to be waning. The markets have weathered the pandemic, supply chain disruptions, geopolitical tensions, inflation spikes, and monetary tightening, emerging stronger each time. Yet, the current sentiment suggests a shift.

Tiredness or Turning Tide?

Perhaps the markets are simply taking a breather after an exceptional rally. It could be a temporary pause, a moment of rest before the uncertainty surrounding the US elections dissipates. If this is merely a ‘time correction’, as some analysts suggest, it may be a healthy consolidation. However, there’s a growing feeling that something more profound is at play.

As highlighted in a recent analysis, earnings estimates are being sharply revised downwards. A Jefferies report points out that analysts have cut FY25 earnings estimates for over 60% of the companies they cover – the highest downgrade ratio since early 2020. This suggests a potential drag on market performance.

Demand Slowdown Signs

The September quarter earnings season also hints at a possible slowdown. Data from CMIE indicates lower sales growth for the non-finance corporate sector and a year-on-year decline in aggregate net profits. Reports of softening urban demand are widespread, attributed to various factors. While rural demand was showing signs of improvement, possibly driven by increased borrowing, the Reserve Bank of India’s (RBI) move to curb excessive loan growth could impact rural consumption as well.

Emkay Research suggests that Indian equities will undergo a ‘time-correct’ phase through the second half of FY25, marked by extreme volatility. The Nifty currently mirrors levels seen in early July, indicating four months of such correction already. Many small and mid-cap stocks have experienced steeper declines. The wealth effect from earlier market gains, which fuelled premium consumption, might also diminish with market corrections.

Glimmers of Hope Remain

Yet, Diwali is traditionally a time for optimism. Looking at the brighter side, both the RBI and the finance ministry maintain that the September quarter slowdown is transient, attributing it to unusually heavy rains and the inauspicious period of Pitru Paksha. They anticipate that a good kharif harvest will boost rural consumption. The India Flash Purchasing Managers index for October signals renewed economic momentum, at least among larger firms. The RBI’s survey on manufacturing capacity utilisation showed the highest seasonally adjusted capacity utilisation in Q1 FY25 since Q3 FY19, suggesting a potential revival in corporate capital expenditure.

Globally, positive signals exist too. Inflation is moderating, paving the way for potential rate cuts that could support markets. Global growth appears to have bottomed out, and crude oil prices have softened despite ongoing Middle East tensions.

Consider the case of Five-Star Business Finance, whose shares tumbled after a revised AUM growth guidance, despite strong quarterly results. This illustrates the market’s sensitivity to growth projections. However, HDFC Securities suggests a portfolio of Diwali picks, indicating continued belief in stock-specific opportunities.

Is this a buying opportunity then? India’s long-term growth story remains robust. Short-term volatility, perhaps triggered by events like the US elections, could indeed present chances to accumulate fundamentally strong businesses at attractive valuations. The key might be discerning between a temporary dip and a more sustained downturn.