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Is the upward trend seen in the markets sustainable?

Reasons behind the present market rally are not good enough to support the market in the long run, says Dhirendra Kumar

Markets are moving up, while COVID positive cases are touching a new peak almost every day. What is the rationale behind this? Is it just because industries, shops, etc. are functioning? Is this a sustainable growth in your opinion?
- Sridhar Neelakantan

I don't know. I am not worried but I am quite surprised by the market movement and the surrounding reality that I see. I spoke to many people and I was also thinking hard about it. Like most analysts, I am also giving my own opinions because no one can really say for sure. But I guess two things are driving the market.

One is that central banks across the world have unleashed liquidity in the system. So, there is a lot of liquidity that is finding its way into the market. In the Indian context, it was a little unusual. A few weeks back, SEBI chief said that he was quite surprised that the participation of retail investors in the market had gone up so dramatically. So, many investors are actually investing directly in equity and they have the money i.e. for them liquidity isn't much of an issue. The other thing is that many large institutional investors have taken a view that whatever the crisis is, only a year would get affected because of it and therefore, everybody is trying to discount what will be ahead.

But I agree with you. The market grows on a sustainable basis only on the back of rising earnings of companies. If companies don't sell more or earn more or make more profits, these stock prices cannot be sustained. So, yes, the reasons behind the present rally, such as liquidity or hope that the situation led by the COVID-19 pandemic isn't as severe as expected, are not good enough to support the market in the long run. Earnings have to catch up and they have to catch up substantially to support the current recovery. This is because we have almost recovered what we lost in the month of March.

So, I agree with you more than I believe in the current state of the market. But you know it requires a couple of bad news to combine together to shake or drag the market. When that will happen, I don't know but we are not getting any good news on the earnings front of companies reporting their earnings today either. But still, the market continues to go up. So, I don't really know what will drag the market down.