Peak Earnings
Valuations are expensive across sectors as every single sector in India (except technology) is trading at a steep premium to its own long-term average.
One of the biggest mistakes any investor can make is to forget the concept of cyclicality of earnings, that earnings oscillate around a long-term trend and the fact that earnings cannot grow faster than nominal GDP indefinitely. To compound this mistake at the top of a market cycle, investors start paying peak multiples for these peak earnings. Normally, all investors are taught to adjust the multiples you are willing to pay to take into account the cyclicality of earnings. Therefore, one must pay lower multiples for peak profits and high multiples on depressed profits. However, at the top of a market cycle, investors lose this discipline and agree to pay top-of-cycle multiples on the peak of cycle profits and this normally will happen whenever investors start believing that we have entered a new era, where-in earnings can de-link from nominal GDP indefinitely.
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