The era of indiscriminate rallies is over
Now that we have at least turned back the cycle in favour of fundamental characteristics such as Earnings and Quality of businesses explaining most of the performance vs rapid valuation expansion explaining most of the price performance specially between 2023 -24.
Sep 2025 - 3 mins read
https://www.pgimindia.com/api/v1/insights/download/image/CEOLetter-September20251140x350px.jpg
Now that we have at least turned back the cycle in favour of fundamental characteristics such as Earnings and Quality of businesses explaining most of the performance vs rapid valuation expansion explaining most of the price performance specially between 2023 -24. I thought it’s the right time to get this message out to all of you.
To drive this home let’s look at data from FY21 to FY24, India’s listed corporate earnings experienced a powerful rebound. Nifty indices registered rapid EPS expansion off a COVID era low base and amid robust government capital expenditure (capex). By FY25, the earnings cycle clearly moderated, with single digit growth at the index level and a tempering of public capex. So now fast forward to today now that investors have no reason to pay extra attention to aggregates the focus has shifted back pretty decisively in favour of structural businesses with repeatable growth characteristics. These facts re centre attention on business quality and earnings durability over cyclical tailwinds.
Source: Bloomberg
NIFTY 500: A Historic Earnings Surge Driven by Recovery and Capex
Over the past 17 years, NIFTY 500 earnings have rarely seen the kind of growth witnessed between FY21 and FY24. Historically, annual EPS growth averaged ~4% from 2009 to 2019, with several years of negative or low single-digit growth. In contrast, the post-COVID period delivered extraordinary numbers:
| Years | FY 2021 – FY 2024 | FY 2024 – FY 2025 |
| EPS CAGR | 24.3% | 6.5% |
(Source: Bloomberg)
The unusually high earnings CAGR from 2021-24 running at 24% CAGR was fuelled by post-COVID recovery, government capex, and structural tailwinds. With these factors now normalized, growth has reverted to single digits, aligning with long-term trends.
This surge was not structural but cyclical. Two key factors explain it:
1. Demand Recovery: The pandemic-induced contraction created a low base. As restrictions eased, consumption and industrial activity rebounded sharply, lifting corporate earnings across sectors.
2. Elevated Government Capex: From FY21 onward, central government capital expenditure grew at a pace well above historical norms, fuelling infrastructure, construction, and allied industries. This amplified earnings for businesses that were not traditionally high-growth.
By FY25, growth normalized to 6%, marking the end of this exceptional phase. The data underscores how rare such a multi-year earnings spike has been for NIFTY 500 and how it was largely driven by temporary tailwinds rather than structural shifts.
Muted Performance of High-Quality Stocks (2021–24)
While cyclical and capex-linked sectors soared, high-quality compounders-consumer staples, IT, and select financials-posted muted EPS growth during this period. Their defensive nature and premium valuations kept returns subdued compared to the broader market rally.
FY25: Growth Normalizes
- EPS Growth Slows: NIFTY 500 EPS growth dropped to single digits, compared to the mid-20s seen earlier.
- Capex Momentum Moderates: Government capex growth slowed, with FY25 revised estimates lower than budgeted figures. Fiscal constraints and election-related spending curbs contributed to this moderation.
- Private Investment Still Tepid: Despite structural positives, private sector capex remains subdued, adding to the slowdown.
Key Takeaway
The period of indiscriminate earnings growth driven by external tailwinds appears to have passed. Recent trends highlight the importance of focusing on businesses with robust fundamentals and consistent performance, rather than relying on cyclical factors.
Why This Is the Time for Quality
With government-led stimulus fading and earnings growth normalizing it is time to look at more stable high-quality and high-growth businesses with features such as:
- Sustainable competitive advantages
- Strong balance sheets
- Consistent ROCE and cash flows
The era of indiscriminate rallies is over. Investors should pivot toward portfolios built on quality and durability, not cyclical tailwinds.
Back 
© PGIM India Asset Management Private Limited
Connect with us :
