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The previous week witnessed a robust recovery in US markets, with the S&P 500 and Nasdaq gaining approximately 2% and 3%, respectively. Meanwhile, the S&P 400 (midcap) showed a slight gain, and the S&P 600 (smallcap) remained relatively flat.

Indian markets also demonstrated positive performance, with the Nifty and Sensex gaining just under 1%. Both the BSE midcap and NSE midcap 100 indexes experienced slight gains, while the BSE smallcap index surged by 1.6%, outperforming other segments.

A notable highlight was the IT indexes on both BSE and NSE, exhibiting a 5% gain for the week. This surprising uptrend occurred despite weak earnings and FY24 guidance from major IT companies, suggesting that Mr. Market may be shifting attention from reported figures to normalized ones. IT firms reported lower profits due to margin constraints resulting from delayed client spending and increased employee salaries during the prior boom phase.

Anticipation of a return to normalcy in the coming year, driven by Fed rate cuts, is expected to encourage Fortune 500 businesses to resume strategic IT spending. This shift toward Cloud, Digital Transformation, Analytics, Generative AI, and the Metaverse could provide a significant boost to Indian IT companies specializing in these services.

In India, CPI reports showed a lower-than-expected inflation rate of 5.69%, compared to the projected 5.87%. Conversely, the US CPI report exceeded expectations, recording 3.4% instead of the anticipated 3.2%. Notably, a Redfin report indicates a third consecutive monthly decline in US rents, with a year-on-year fall of -0.8%. The decline in rents is expected to contribute to more benign future CPI reports.

On the valuation front, the Nifty 50 PE stands at 23, while the midcap and smallcap indexes are valued at around 25 and nearly 30, respectively. Despite appearing undervalued on a reported basis, large caps might be even more undervalued on a normalized basis, given the substantial weightage of Banks and IT, which likely exhibit non-normal earnings.

Comparatively, the US markets appear more attractively priced, with the S&P 500 sporting a PE of 21.8 and a forward PE of 19.6. The S&P 400 midcap index and S&P 600 smallcap index exhibit even lower PE ratios, standing at 15.9 and 14.9, respectively.

Examining specific sectors in India, Banks and Financial Services present attractive PE ratios, with Nifty Bank at 16 and Nifty PSU Bank at a mere PE of 8. However, Nifty Oil & Gas is valued at nearly 9, while Nifty Auto and Nifty IT show PEs of 27 and 31, respectively. The most expensive sectors include Nifty Consumer Durables at 71, Nifty Realty at 57, and Nifty FMCG at 45.

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