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Why Markets May Not Cheer 20% Earnings Growth Amid Rising Inflation
M
Moneycontrol•09-10-2026, 13:56
Why Markets May Not Cheer 20% Earnings Growth Amid Rising Inflation
- •The September quarter is expected to deliver strong earnings growth of 20 percent or more, but benchmark indices like the Nifty 50 have remained flat due to contracting profit margins.
- •Soaring inflation driven by high crude oil prices has caused raw material costs to surge significantly, putting pressure on corporate gross margins.
- •The WPI and CPI spread has widened significantly, forcing companies to choose between absorbing higher costs or passing them on to consumers, which risks hurting demand.
- •Analysts warn that cost-cutting measures supporting recent profit margins are temporary and unlikely to be sustained, potentially triggering future earnings downgrades.
- •Experts recommend focusing on large-cap companies with strong pricing power and defensive sectors like FMCG, pharma, telecom, and IT while exercising caution with mid- and small-caps.
Key Questions Answered
Despite expectations of bumper earnings growth of 20% or more, headline indices have remained flat due to contracting gross margins driven by accelerating input-cost inflation.
When the wholesale price index and consumer price index spread exceeds 300 basis points, gross margins compress by close to 400 basis points as firms face pressure from rising raw-material costs.
Investment houses like Ambit and Systematix recommend defensive sectors such as FMCG, pharma, telecom, and IT, favoring large-cap companies that possess superior pricing power and can absorb higher costs.
