stock market analysis: Bulls may outnumber bears next week as focus shifts to earnings

MUMBAI: The domestic equity market ended another week of lackluster trading as the benchmarks slid around 2 per cent each despite a more than 1 per cent surge in today’s session.

“The current correction can be metaphorically compared to the steady process of releasing steam from a pressure cooker in order to let the food cook. Markets too demand a measured approach for it to cook up for the bull rally ahead,” said Nirali Shah, head of equity research at Samco Securities.

The threat to growth from rising Covid-19 cases and shrinking appetite among investors for taking risk has weighed on the market’s performance over the past two weeks. The emergence of the second Covid-19 wave in India is raising risks for downgrades to investors’ lofty expectations for earnings at a time when valuations are frothy.

In addition to Covid, the rising trajectory of the US dollar is also contributing to the selling pressure from foreign portfolio investors as they unwind some of their carry trades. The US dollar index broke above the psychologically crucial resistance of 92.5 earlier in the week.

Market participants expect next week to bring some green to the trading screens on Dalal Street as indices have already seen considerable pullback of more than 5 per cent and as investors’ focus shifts towards the upcoming earnings season.

The March quarter earnings season is expected to be strong with sectors such as information technology, metals, textiles, real estate and capital goods likely to report strong earnings. Further, the low base of the year ago quarter will optically make the current quarter earnings appear stronger.

Analysts expect Nifty50 companies to end the current financial year with more than 10 per cent earnings per share despite the damaging effect of the pandemic.

Another factor that may contribute to gains in the market will be the likely year-end buying from domestic mutual funds. “The NAV (net asset value) game will happen next week, so you will see the market go higher,” said Paras Bothra of Ashika Broking.

The sustainability of any gain in the market next week will largely depend on how the US dollar behaves. The recent strength in the greenback against emerging market currencies has worried market participants with technical analysts suggesting that the US dollar index could edge higher towards 93.5-94 in the coming weeks, which may trigger larger FPI outflows from emerging market equities like India.