‘Sell in May and go away’ is an old stock market adage. Studies over five decades on the US S&P 500, a benchmark index of top 500 American companies, show that returns were an average of 4% lower between May and October than between November and April in a year. That is primarily a case applicable to US markets due to local factors. This stock market strategy also affected financial markets that were dependent on global capital flows.
Over the past two years, India’s stock markets have been less dependent on foreign capital flows as significant money has moved into equities from domestic retail and institutional investors. Domestic investors are bound to buy only Indian equities. As a result, their steady direct and indirect monthly flows put a cushion at the bottom. Even if foreigners sell, locals will not. They may not buy more equity only if valuations are rich. Now, the most significant risk to Indian markets is valuation. Both foreign and domestic investors think Indian markets are richly valued compared to their profit growth prospects.
Risk is relative
That brings us to the issue of risk in the market. The stock market is driven by greed and fear. Right now, despite rich valuations, foreigners are buying more Indian equities. They are trying to find quality companies that still offer good entry points. While valuation as a risk is a relative term, it is probably the consideration. India is probably the least affected country by the Trump trade wars. In the latest World Economic Outlook, the International Monetary Fund, a global lending agency, has marginally cut India’s growth rate for 2025-26. India remains the fastest-growing large economy at 6.2% (rather than 6.5% previously). The IMF estimate does not consider a US recession. That could hurt the world economy, and India cannot escape the impact. That would be known only by 2026. As a result, foreigners are parking money in Indian equities. That could be a function of caution and not valuation.
Caution is universal
The most significant indicator of why caution is universal can be seen in the price of gold. It has scaled a new high and continues to do so as central banks worldwide and individuals pile up the yellow metal. With share prices at a record high, there is a possibility of correction if the profits of businesses do not meet expectations. The recent data for quarterly results in India for the March 2025 quarter and the financial year 2024-25 shows no significant upside to the profit outlook for the year ahead. The reading shows that the corporate balance sheets are stronger, with more cash and less debt on books. However, there is a reluctance to spend money or expand capacity. Many analysts expect companies to expand their businesses in the next financial year.
The uncertainty of global tariff wars and conflict threats has dampened the sentiment. It is hard to decide on the deployment of investment in uncertain times. You have a situation where stock market valuations are at a record high despite uncertainty ahead. Warren Buffett’s Berkshire Hathaway announced that as of the March 2025 quarter, it is holding over $300 bn in US treasury bonds. That is caution at the highest level. A company meant to deploy capital efficiently believes that government bonds are the safest place to park money.
You need to assess the risk associated with your money carefully. These are times when you can afford to err on caution. Staying out of volatile markets is a good idea if you are uncomfortable. There is a lot of knowledge around you that you can soak while you wait for your turn to find that market bottom.