Investors in the Indian stock market were originally expecting a strong earnings season to justify the high valuations, but they may be disappointed.

Zhongtong Finance APP noticed that strategists predict that within the three months ending in June, the overall net profit growth of companies in the core Indian stock index—the NSE Nifty 50 index—is sluggish. Citigroup expects that the total net profit of these companies may only increase by 2% compared to the same period last year, while Motilal Oswal Securities Ltd. expects an increase of about 4%. In contrast, in the previous quarter, the overall net profit growth of companies in the NSE Nifty 50 index exceeded 11%, surpassing the general expectations of analysts.

This is not enough for analysts who find it difficult to justify the 11% rebound in the Indian National Industrial Index from the sell-off on June 4th. Investors were shocked when the ruling party in India lost the majority of seats in parliament, triggering the sell-off. Part of the reason for the slowdown in earnings is the severe heatwave, prolonged election activities, and the central bank's restrictions on unsecured loans, all of which suppressed consumption.

Vinod Nair, the head of research at Geojit Financial Services Ltd., said: "The initial expectations for the earnings season are low." He believes that the profitability of Indian companies will be under pressure as weak demand forces companies to take measures to increase sales, which may harm their profits and stock valuations. "The period of profit margin expansion seems to be coming to an end," Nair said.

Energy, banking, and commodity companies are expected to have a tough quarter and drag down the overall performance of the Nifty. Credit growth at HDFC Bank Ltd. and Bank of Baroda Ltd. has been declining, indicating that banks (which have the highest weight in the index) are struggling to maintain the rapid expansion of recent years.

Local stocks need sustained earnings growth to justify high valuations. Data shows that the price-to-earnings ratio of the Nifty exceeds 20 times the expected earnings over one year, which is 27% higher than its historical average.

It is certain that technology companies (which account for 13% of the Nifty 50 index) may help offset the slowdown in the banking sector. Nomura Holdings said last week that the industry's slowdown is likely to bottom out in the quarter ending in June and is unlikely to worsen further. Motilal Oswal upgraded the rating of software exporters from 'reduce' to 'buy'.

Tata Consultancy Services Ltd. will announce its results on Thursday, officially kicking off this earnings season. HCL Technologies Ltd. will announce its financial report on Friday.

Data shows that the Indian stock market is expected to outperform other Asian stock markets for the fourth consecutive year. A recent survey showed that strong economic growth, robust local mutual fund purchases, and stable earnings so far make India one of the preferred choices for outstanding performance for the remainder of 2024.

As Modi returns to the position of Prime Minister and assures investors that he will continue to focus on growth-promoting policies, the main stock indices hit new highs. The factors supporting these gains are the market's expectation that the Modi government will use the $25 billion dividend provided by the central bank in the upcoming budget to stimulate consumer and infrastructure spending.

Gautam Duggad, research director at Motilal Oswal, wrote this week: "Infrastructure, capital expenditure, and manufacturing will continue to be the focus of attention and will take center stage."

However, Citigroup said that the slow start to the new fiscal year ending in March 2025 could lay the groundwork for a short-term consolidation in the local stock market.

Dhananjay Sinha, co-head of equities at Systematix Group, said in the middle: "If the June quarter reflects weak demand and compression of corporate profit margins, I would not be surprised if this year's earnings growth falls to the mid-single digits. Investors will find it difficult to get strong returns from the market they have become accustomed to."