Why the sensex is flat over a year

Mumbai: The sensex has delivered 0% returns over the past 12 months, underperforming most global markets, despite several positive factors like I-T and GST relief, interest rate cuts and steady domestic fund flows.What explains this weak performance? According to analysts, weak fundamentals are a major drag on Dalal Street’s gains.“The weak performance of the Indian market over the past year may seem surprising, given the euphoria among retail investors, several narratives that drove certain sectors and themes periodically, large fiscal and monetary support, and weak rupee (positive for earnings). However, it is less surprising when viewed against earnings and valuations,” a report by Kotak Institutional Equities said.The broader market has performed worse than the 30-share sensex over a year. BSE’s midcap and smallcap indices are both down more than 4% over the past 12 months.Earnings-Valuation MismatchAccording to the report, valuations have remained elevated despite several stocks being flat or down over this period due to constant earnings downgrades.“Corporate earnings have been lacklustre with Nifty 50 companies delivering 8% growth, below market expectations, as delayed urban demand recovery and persistent input cost inflation weighed on performance,” Devarsh Vakil, head of Prime Research at HDFC Securities, said.

How did valuations surge in the first place? The post-Covid pent-up consumption demand is partly to blame. “The growth rate in earnings shot up between 2022-24. This led to markets commanding higher valuation premiums,” said Siddarth Bhamre, institutional research head at Asit C Mehta Investment Intermediates.The broader market has performed worse than the 30-share sensex over a year. BSE’s midcap and smallcap indices are both down more than 4% over the past 12 months.Foreign Investor FlightTrade tensions with the US have created policy uncertainty — this, in turn, has heightened foreign investor caution and accelerated portfolio shifts toward cheaper emerging markets, Vakil said.While foreign funds (FPIs) have pulled out around $20 billion in 2025, domestic institutional investors have pumped in around $62 billion in the same period. However, this hasn’t led to sizable year-to-date gains — the sensex is up 5.5% year-to-date.

The underperformance “disproves the market’s belief in ‘flows’ as a driver” of Dalal Street, the Kotak report said.To be sure, the steady mutual fund flows have cushioned the impact from FPI selling. “Without mutual fund flows, FPI selling would have had a large negative impact on the markets,” Bhamre said.According to market players, such flat growth periods are opportunities for long-term mutual fund investors to accumulate units in their portfolios.

While mutual fund industry body data showed that equity MF flows saw a sharp decline, the drop in SIP flows was modest. “Healthy SIP inflows reflect the confidence that retail investors have in the markets,” Ankur Punj, MD & business head at Equirus Wealth, said.What Next?According to Vakil, the return of foreign investors and a recovery in earnings will lift Dalal Street sentiment. “A mutually acceptable resolution to US trade negotiations would eliminate policy uncertainty and restore FPI confidence.

Stronger Q2 earnings would signal economic recovery and drive stock-specific rallies. Global interest rate easing will also make India more attractive to yield-seeking investors, potentially triggering renewed capital inflows,” he said.Capital expenditure announcements by govt and the private sector will be a bigger trigger for the revival of the consumption cycle, which will eventually lead to earnings recovery, Bhamre said. “Reduction of interest rates and taxes are supportive factors but not a deciding variable in decision making to spend,” he said.Analysts at Kotak expect a gradual earnings improvement over the next few quarters and strong earnings growth in FY27. “However, valuations are rich, despite our strong expected earnings recovery,” the report cautioned.