'Historically elevated valuations suggest returns may lag earnings'

How is your team viewing the current market valuations and preparing for possible corrections? From a three-year perspective, earnings are the main driver of equity returns. Indian corporates are well-positioned in the profit cycle, with a rising profit-to-GDP ratio over the past four years. Valuations, measured by the earnings yield spread over government bond yields, are higher than historical standards. This suggests index returns might lag behind earnings growth due to elevated valuations. Broader market valuations are even more expensive than large-cap indexes. In our asset allocation products, we consider these top-down views. However, in our equity schemes at SBI Mutual Fund, we maintain a long-term perspective and employ a bottom-up approach, concentrating on companies with strong business models, long-term earnings growth visibility and sustainable cash flows. We believe this will enable us to navigate market corrections while staying focuse

This article was originally published on November 05, 2024.