BSE’s Sensex Is Fairly Valued

BSE’s Sensex Is Fairly Valued

Even if equitymaster.com's prediction comes true, when can we expect to see Sensex 40000? From an investor's point of view, there is a huge difference between waiting a few months and waiting a few years. 

Alas! These are questions that no one can answer with certainty. The future is unknowable... But we can make educated guesses. 

If we look at the historical valuations of the Sensex, one thing becomes clear immediately. The market is not overvalued. 

Yes, individual stocks are overvalued, but not the entire market. 

However, the markets aren't cheap either.

Interestingly, the Sensex P/E hasn't crossed 25 since mid-2008. 

If we were to tentatively consider a P/E of 25 as an upper limit, at least in the short-term, we would still get an upside of nearly 13% from current levels. That's a Sensex level of 33500. 

But if that were to happen in a hurry, it would make the markets overvalued. That would be a cause for worry, not celebration. 

That's why we are so focused on earnings growth. The only way the Sensex can make it to 40000 without entering the bubble zone, is on the back of a sustained earnings recovery. 

We haven't seen much evidence of that yet. But we believe a recovery could be around the corner.  

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