On August 5, 2024, the Indian stock market experienced a significant decline, with both major benchmarks, the Sensex and the Nifty 50, plummeting over 3% each during intraday trading. This sharp drop reflects a broader global trend, influenced by rising recession fears in the US and escalating tensions in the Middle East. The selloff resulted in a substantial loss for investors, wiping out nearly ₹15 lakh crore in market capitalization. This report examines the key factors driving this downturn and their implications for the Indian market.
The recent spike in the US unemployment rate to 4.3%—its highest in nearly three years—has fueled concerns about a potential recession. This development, combined with poor job data for July, has rattled investor confidence. The increased likelihood of a US recession has prompted Goldman Sachs to raise the probability of such an event to 25% over the next year. As a result, the US Federal Reserve is expected to cut rates to support economic growth, which has heightened global market uncertainty. The geopolitical landscape has added further stress to the markets, particularly with escalating tensions between Iran and Israel. Iran’s threats of retaliation following the death of a Hamas leader and the increased US military presence in the region have heightened fears of a broader conflict. Such geopolitical risks often lead to market instability, as investors seek safer assets amid rising uncertainties. Indian stock market valuations are currently perceived as overextended. The sustained liquidity flows have driven up valuations, particularly in mid and small-cap stocks, leading to concerns about a potential correction. The Nifty 50’s current price-to-earnings (PE) ratio of 23.1 exceeds its two-year average, indicating that the market may be due for a correction. Corporate earnings for the June quarter (Q1 FY25) have been underwhelming, failing to meet market expectations. The mixed results and slowing earnings growth in several sectors have triggered profit-taking among investors. With high market valuations, the weaker earnings performance has contributed to a negative sentiment, exacerbating the market decline. The Nifty 50’s fall below its 20-day moving average has signaled weak market sentiment from a technical perspective. Key support levels for the index are now being tested, with significant implications for future market movement. A close below 24,000 could lead to further declines, while a recovery above 24,400 might stabilize the index.
The Indian stock market’s recent sharp decline is a reflection of multiple converging factors, including global economic uncertainties, geopolitical tensions, and internal market conditions. With the Sensex and Nifty 50 both facing significant losses, investors are grappling with heightened risk. Monitoring these factors—particularly developments in the US economy and geopolitical tensions—will be crucial for anticipating further market movements. As the situation evolves, investors should remain cautious and vigilant, adapting their strategies to the changing market dynamics.
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