Sensex Down 3%, Nifty 50 Drops 2%: Know the 5 Reasons Behind the Market Fall

Indian stock market benchmarks, the Sensex and the Nifty 50, experienced a sharp decline of up to 3% in early trading on Monday, August 5. This drop mirrored a global trend spurred by increasing fears of a US recession and rising tensions in the Middle East, which kept investors wary.

As of 9:45 am IST, the BSE Sensex had fallen by 1.90% to 79,442, while the Nifty 50 was down by 2% at 24,232. The BSE Midcap and Smallcap indices also dropped over 2% each at that time.

The Sensex faced a significant selloff across the board. It opened at 78,588.19, down from its previous close of 80,981.95, and quickly plummeted 3% to 78,580.46. Similarly, the Nifty 50 started at 24,302.85, down from its prior close of 24,717.70, and decreased over 2% to 24,192.50.

The overall market capitalisation of companies listed on the BSE fell from nearly ₹457 lakh crore in the previous session to around ₹447 lakh crore, resulting in a loss of nearly ₹10 lakh crore for investors within an hour of trading.

"The global market is struggling as bears dominate, driven by a series of negative news. Initial concerns arose from fears of a reverse yen carry trade following Japan's interest rate hike. This was exacerbated by recession fears in the USA after poor job data, unsettling market sentiment. With China and Europe already facing slowdowns, rising geopolitical tensions are adding further strain," explained Santosh Meena, Head of Research at Swastika Investmart.

Here are a few factors impacting the Indian stock market:

US Recession Fears: Concerns over a potential US recession have sharply reduced global investors' risk appetite after July's payroll data showed the US unemployment rate rose to a nearly three-year high of 4.3%, up from 4.1% in June. This marks the fourth consecutive monthly increase in unemployment.

"The global stock market rally has been largely driven by expectations of a soft landing for the US economy. This expectation is now under threat due to the decline in US job creation in July and the sharp rise in the unemployment rate to 4.3%," noted V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

According to Bloomberg, Goldman Sachs economists have raised the probability of a US recession in the next 12 months to 25% from 15%.

Given these recession fears, experts anticipate possible rate cuts by the US Fed this year, with some predicting cumulative cuts of 100 bps in September, November, and December. JPMorgan experts foresee a 50 bps rate cut in September and another 50 bps cut in November.

Rising Tensions in the Middle East: Media reports indicate that Iran has vowed revenge after Israel killed Hamas political chief Ismail Haniyeh during his visit to Iran for the inauguration of newly elected Iranian President Masoud Pezeshkian. The escalating threats and actions from both sides have heightened fears of imminent conflict, prompting the US to bolster its military presence in the region. Investors worldwide are closely monitoring the situation, as any further escalation could significantly impact market sentiment.

Stretched Valuation: The Indian stock market is currently overvalued, according to experts, suggesting a healthy correction may be due. High valuations, especially in the mid and small-cap segments driven by sustained liquidity flows, are under scrutiny. Overvalued sectors like defense and railways may face pressure. "The buy-on-dips strategy, successful in this bull run, is now at risk. Investors should wait for the market to stabilize before making any purchases," advised Vijayakumar.

The equity research platform Trendline reports that the current PE (price to earnings) ratio of the Nifty 50 is 23.1, above its two-year average of 21.9. Similarly, the index's PB (price to book) ratio stands at 4.17, slightly above its two-year average of 4.09.

Unimpressive Q1 Results: The June quarter (Q1FY25) results for India Inc. have been mixed, failing to boost market sentiment. With current market valuations high, experts worry that earnings may not sustain these levels. While recent rallies have been supported by earnings growth, some sectors are seeing a moderation in earnings, potentially triggering profit booking in the market.

Technical Factor: Nifty 50 Falls Below 20-DMA: The Nifty 50's drop below the 20-day moving average indicates weak market sentiment.

"Nifty has support at the budget day low of 24075, with the next support at the 50-DMA around 23900. Below this, the major support lies at the 23300 level. On the upside, 24800-25000 will remain a key resistance area," added Meena of Swastika Investmart.

Read our previous article on Sensex & Nifty 50 Drop 1%: Why is the Market Falling?