On Monday, August 5, Indian stock market benchmarks, the Sensex and the Nifty 50, experienced significant declines of nearly 3% each. This drop was in line with global market trends, as concerns over a potential US recession and escalating tensions in the Middle East unsettled investors
The Sensex saw a sharp decline from its opening value of 78,588.19, compared to the previous close of 80,981.95, plunging by 3.3% to 78,295.86 during the session. Similarly, the Nifty 50 began at 24,302.85, down from its prior close of 24,717.70, and fell by 3.3% to reach 23,893.70.
By the end of the trading day, the Sensex closed at 78,759.40, marking a drop of 2,223 points or 2.74%. The Nifty 50 ended at 24,055.60, down by 662 points or 2.68%. The BSE Midcap index decreased by 3.60%, while the Smallcap index suffered a 4.21% decline.
Here are five significant factors that appear to have greatly impacted the Indian stock market:
1.US Recession fears
Concerns about a potential recession in the US have significantly shaken investor confidence worldwide. The US unemployment rate rose to 4.3 percent in July, a near three-year high, compared to 4.1 percent in June. This marked the fourth consecutive monthly increase in unemployment.
“The recent rise in US unemployment and the slowdown in job creation threaten the expectation of a soft landing for the US economy, which has been driving the global stock market rally,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services”.
A Bloomberg report states that Goldman Sachs economists have increased the likelihood of a US recession to 25 percent from 15 percent within the next year.
Due to these recession fears, experts predict that the US Federal Reserve may cut interest rates this year. Some suggest the Fed might reduce rates by a total of 100 basis points in September, November, and December. JPMorgan experts foresee a 50 basis point cut in September and another 50 basis point cut in November.
2. Increasing Conflicts in The Middle East
According to media reports, Iran has promised to retaliate after Israel killed Hamas political leader Ismail Haniyeh. Haniyeh was in Iran to attend the inauguration of the newly elected Iranian President Masoud Pezeshkian when he was killed.
As reported earlier by Mint, increasing threats and provocative actions from both sides have raised fears of an impending war. The United States is boosting its military presence in the region in response to the rising tensions.
Investors worldwide are closely watching the situation. If the conflict escalates further, it is likely to have a significant negative impact on market sentiment.
3. High valuation
The current valuation of the Indian stock market is considered high, and experts believe it is due for a correction.
The high valuations are mainly driven by continuous liquidity flows, especially in the mid and small-cap segments. Overvalued sectors like defence and railways may face pressure. The strategy of buying on dips, which has been successful during this bull run, may no longer be effective. Investors are advised not to rush into buying during this correction but to wait until the market stabilizes,” said Vijayakumar.
Trendline, an equity research platform, reports that the current price-to-earnings (PE) ratio of Nifty 50 is 23.1, higher than its two-year average of 21.9. The index’s price-to-book (PB) ratio is 4.17, slightly above its two-year average of 4.09
4. Disappointing First Quarter Results
India Inc.’s financial results for the June quarter (Q1FY25) were mixed and did not lift market spirits. Experts worry that the current high market valuation might not be supported by these earnings.
Recent market gains have been driven by earnings growth, but experts observe a slowdown in earnings across several sectors. This slowdown may have led to some investors selling off stocks to lock in profits.
5. Technical aspect: Nifty 50 drops below its 20-day moving average
The Nifty 50 dropped below its 20-day moving average, indicating weak market sentiment.
Experts say the market might recover if it closes above 24,400. However, if it closes below 24,000, a deeper correction could occur.
Shrikant Chouhan, head of equity research at Kotak Securities, noted that for the first time in a while, the Nifty closed below its 20-day simple moving average, which is generally negative. The Nifty also formed a long bearish candle on daily charts, suggesting more weakness ahead.
Chouhan mentioned, “The market is currently weak and volatile, but due to temporary oversold conditions, we might see an intraday pullback rally. For day traders, 24,000 is the immediate reference point. If it stays above this, we might see a pullback to 24,150-24,250.”
“Conversely, if it falls below 24,000, selling pressure is likely to increase. In that case, it could test the 23,900 level and potentially drop further to 23,800,” Chouhan added.
Disclaimer: The opinions and advice given are from individual analysts, experts, and brokerage firms, not from Mint. We recommend that investors talk to certified professionals before making any investment choices.