The recent rally in small and midcap (SMID) stocks is not backed by fundamentals and is a case of irrational exuberance, analysts at Kotak Institutional Equities said in a recent report.
The fundamentals of most of these companies have, in fact, worsened over the last few months, they noted.
Yet, some analysts expect the bull run in these stocks to continue amid intermittent corrections.
The Indian markets have seen a good run in the last three months with the S&P BSE Sensex rising around 7 per cent and the Nifty50 moving up 7.5 per cent.
The next leg of the market rally from here on, analysts suggest, will be driven by a growth in corporate earnings over the next few quarters.
That said, they do not expect material / sharp downgrades to India Inc s earnings estimates despite headwinds for the economy.
Equity market is in a ‘vulnerable zone’ and are likely to remain very volatile, impacted by the sharp rise in Covid cases in the country since the past few weeks that has seen many state governments impose lockdowns and mobility restrictions to check the rampant spread, said analysts at HSBC in a recent report. They, however, have ruled out a deep correction for now. From a medium-to-long term perspective, however, most analysts remain bullish about the markets but do caution against the possible earnings downgrades given the sporadic lockdowns and expensive valuation. While lockdowns can weigh on growth expectations in the near term, acceleration of vaccine drives and overall direction of active cases will still act as the key catalyst for the market.