Stock market correction: What Jeffries says about the biggest decline in earnings since the start of 2020

Jefferies’ Christopher Wood, in his latest note, Greed and Fear, noted that the Indian stock market has seen a healthy correction in recent times, especially in the small- and mid-cap sector. This comes in the context of a second-quarter earnings season that saw the biggest decline in earnings since the start of 2020, he said.

Jeffries said its India office has cut FY25 earnings forecasts for 63 percent of the 121 Indian companies under its coverage that have now reported Q2 FY25 earnings results, the highest rate of cuts since inception 2020.

“This appears to reflect the impact of the cyclical downturn signaled by high-frequency data from Jeffreys’ India office recently. The Jeffreys Economic Indicator (JEI), an Indian economic indicator based on monthly data on 35 indicators, rose 4.3 percent. cent year-on-year in September, up 1.7 p.p. above the three-year low of 2.6% yoy in August, but remaining 0.6 pp higher. below the level since the beginning of the calendar year.” Jeffries said.

Wood said he believes the recent stock market correction is healthy, especially because it has impacted the priciest part of the market, while relatively inexpensive private sector banks have recently started outperforming amid expectations of a potential reduction in cash reserve ratios. (CRR) of the Reserve Bank of India in the coming months.

In this regard, Jeffries Indian banking analyst Prahar Sharma, in a just-released report, suggested that RBI’s change in liquidity stance from withdrawal to neutral should ease concerns. Additionally, loan and deposit growth rates have now converged from the peak gap of 400 bps. over the past year. This, along with faster deposit growth and easing liquidity, should support banks’ net interest margins,” Wood said.

Nifty shares fell 9.4% from a peak reached in late September to its recent low on Monday. While the Nifty MidCap 100 and Nifty MidSmall Cap 400 indices fell 10.2 percent and 9.7 percent respectively from the September 24 peak to the October 25 low.

Jefferies said strong inflows into domestic equity mutual funds continued while overall domestic flows into equities, at least for now, still outpaced the still-expanding stock supply as companies look to take advantage of strong valuations.

“While total equity capital has increased to approximately $28 billion or $7 billion per month in the last four months (July-October) compared to $32 billion in 1HCY24, bringing total supply since the start of the calendar year to $60 billion.