The relentless selloff in Indian equities has pushed valuations to their lowest in over eight years, as investor sentiment remains cautious. On Friday, the BSE Sensex’s trailing price-to-earnings (P/E) ratio dropped to 20.4x, marking its lowest level since May 2020—excluding the pandemic-induced crash—when it briefly touched 19.5x due to economic concerns.
The current valuation is only marginally higher than July 2016 levels (20.3x) and reflects a 14% discount to the Sensex’s 10-year moving average of 23.6x. This is the steepest gap seen since the 2008 global financial crisis, when the discount widened to 34%.
What Is the Trailing P/E Ratio?
The trailing P/E ratio is a key valuation metric, comparing a company’s current stock price to its earnings over the past 12 months. It is calculated by dividing the current stock price by the earnings per share (EPS) for the previous year.
Why Is the Sensex P/E Ratio Falling?
Analysts attribute the sharp decline to:
✔️ Lingering market uncertainty
✔️ Weak corporate earnings growth
✔️ Investor fatigue over near-term outlook
✔️ Persistent selling by Foreign Portfolio Investors (FPIs)
The index has historically bounced back after trading at such steep discounts, as seen in 2006, 2012, 2013, 2016, 2020, and 2022. However, this time, the market remains significantly undervalued, breaking past long-term support levels.
Parallels to 2008 and the Dot-Com Crash
The current Sensex discount is reminiscent of 2008, when the index collapsed by 55%, dragging the P/E ratio from 27x to 11.9x. A similar long-term discount was also observed after the dot-com bubble burst in 2000, with the index trading below its 10-year average for nearly three years.