Will Valuations Be An Overhang For Market In 2025?

We have all had a good four years now of market rise, having moved from a low 7,500 in 2020 to a high of 26,000 by 2024.

The current reaction in progress since October 2024 has run about three months. While liquidity overwhelmed the concerns on valuations earlier, the sustained three-month decline saw stock values getting smacked and portfolios whipped is now bringing the focus back on valuations once again.

A well-known overvaluation metric is the market cap versus the gross domestic product, made famous by Warren Buffet. It is evident from the chart attached that this ratio has been accelerating higher over the last few years and is now trading at its highest of last 10 years. It reached these levels back in 2007 (went higher till 1.58). The median value of this ratio is around 0.87. So, you can see how far it has moved.

Evidently, the ratio is at stretched levels and hence, history tells us, it is time for some reaction. Right now, this is still a fear and not a dominant sentiment. The continued flow of money from the systematic investment plans is still keeping that sentiment at bay.

Will the changed current environment impact the implications? It can and, maybe, it may not. After all, there have been all kinds of events across the past 25 years, say. We thought nothing could spoil the party of the 2000s and then 2007 and again in 2018. We also thought that there would be no more blue skies from the troughs of 2001–3 or after the collapse of 2008 and troughs of 2013 and 2016. But the market trends have weathered all these and persisted to climb.

So the value of history is that it gives the ability and foresight to handle cycles of different dimensions and directions. And so it shall be again.

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We stand warned not to expect another robust year like the past four. Perhaps, some declines or perhaps some consolidations. Perhaps both. But one thing for certain — not smooth parabolic rides upwards like in recent years.

This is not to mean that everything shall be down and out. But when market tailwinds are missing, stocks tend to go up less than they otherwise would. So, sector and stock tailwinds will be the thing to look for. And also, will the liquidity tailwind persist? Those are the three key tailwinds to watch for successful stock picking and trend plays in 2025.

CK Narayan is an expert in technical analysis, the founder of Growth Avenues, Chartadvise, and NeoTrader, and the chief investment officer of Plus Delta Portfolios.

Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.

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