Early trends in the result season indicate an interesting phenomenon. Companies will broadly live up to their guidance and investor expectations, but valuations seem to be running ahead of what companies can deliver. Given the gradual tightening of valuations, the problem for the markets is not going to arise from business performance, but rather from overpaying in the past for good businesses.
Investors in search of opportunities have shown a tendency to buy businesses at elevated valuations in 2022, which are now haunting them. Markets will be forced to look closer at valuations and be more tight-fisted in what they pay for good businesses. This would mean that even better-run companies are going to see a sideward trend in stock prices. Companies that underperform are going to face an adverse market response. These companies are already running on high expectations and the markets are going to punish even the slightest disappointments.
This result season will probably pan out like a master health check-up for the markets. If there are no major problems, the markets will simply move on. If there are some adverse pointers, the markets will immediately react and respond to them swiftly. The jokers in the pack are the upcoming budget and the Adani FPO since they are coming in the middle of the result season and will have an impact on market sentiment. This will further calibrate the willingness of the market to pay for good business downward. Liquidity will become the driver of valuations and further add to the downward pressure on valuations.
Overall, this result season promises to be more academic than past ones and investors can choose to buy only what they feel is compelling. When reality just doesn’t meet expectations, investing tends to be boring.
