Markets do not move in straight lines and they do not move randomly either. They move in cycles driven by two things that oscillate together: how much companies actually earn, and how much people are willing to pay for those earnings.
- Earnings
- What the business actually produces — slow-moving, driven by the economy
- Multiple
- What the crowd is willing to pay per rupee of profit — fast-moving, driven by sentiment
Example: A stock can double with no earnings growth at all if the multiple goes from 15× to 30× — a "re-rating". It can also halve while earnings rise, if the multiple collapses. Most large market moves are multiple moves, not earnings moves.
The vocabulary, precisely
| Term | Usual definition | How often |
|---|---|---|
| Dip | A fall of under 5% | Constantly. Not news. |
| Correction | A fall of 10% or more from the peak | Roughly once a year, on average |
| Bear market | A fall of 20% or more | Every few years |
| Crash | A very rapid fall, usually 20%+ in weeks | Rare — 2008, March 2020 |
| Re-rating | The multiple expands without earnings changing | Drives much of a bull market |
| De-rating | The multiple contracts | Drives much of a bear market |
What actually drives the turn
- Rates falling, making equity relatively more attractive.
- Earnings recovering from a depressed base.
- Valuations already low because everyone gave up.
- Liquidity — money looking for somewhere to go.
- Rates rising, usually to fight inflation.
- Earnings failing to meet expectations that had become heroic.
- Valuations requiring outcomes that stop being plausible.
- An external shock — but only when the market was already stretched.
Notice that valuation appears on both sides. Cheap valuations do not cause a rally and expensive ones do not cause a fall — but they determine how much damage a trigger does. An expensive market is fragile; a cheap one absorbs bad news.
Why nobody can tell you where we are
The index has risen 65% in eighteen months
Smallcap funds are seeing record inflows, IPOs are being oversubscribed forty times, your colleagues are discussing stock tips at lunch, and the market P/E is near the top of its ten-year range. Your portfolio is up 80% and is now 90% equity because the winners grew. What is the sensible response?
Har saal garmi aati hai, phir barsaat, phir thand. Tareekh badal jaati hai par cycle wahi rehta hai. Market bhi aisa hi hai — jab har koi kehta hai "ab toh sirf upar hi jaayega", tab top hota hai; jab log naam sunna band kar dete hain, tab bottom. Mausam badalta hai, par har baar naya lagta hai.
- Price = earnings × multiple. Earnings move slowly; multiples move fast.
- Most large market moves are re-ratings, not earnings changes.
- A 10% correction happens roughly yearly; a 20% fall every few years. Neither is unusual.
- Valuation does not cause turns, but it determines how much damage a trigger does.
- Nobody can tell you where in the cycle we are. Build a plan that survives being wrong.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- why does the same profit get a higher pe in a bull market
- A re-rating is when the market begins paying a higher multiple for the same rupee of profit — the P/E moves from, say, 15× to 30× while earnings sit still. Since a share price is earnings multiplied by the multiple people will pay for them, a re-rating alone can double a stock. A de-rating is the reverse, and it is why a share can fall hard in a year when its profits actually grew.
- how much fall is called a correction
- A correction is conventionally a fall of 10% or more from the recent peak, and a decline of 20% or more is usually called a bear market. Anything under about 5% is just a dip and happens constantly. These are labels of convention rather than official categories — no exchange or regulator declares one.
- a fall of 20 percent or more from the peak is usually called a
- A bear market. A 10% fall is a correction, and a very rapid 20%-plus fall compressed into a few weeks is generally described as a crash — 2008 and March 2020 being the standard Indian examples. Over the long run Indian markets have seen a 10% correction roughly once a year and a 20% decline every few years, so neither is a rare event.
- can a stock price double without earnings growing
- Yes — if the multiple the market is willing to pay doubles, the price doubles with earnings completely flat. Most large market moves are multiple moves rather than earnings moves, because earnings change slowly while sentiment changes fast. The same arithmetic runs in reverse, which is how a de-rating can halve a share whose profits were rising the whole time.
- how do I know if the market is near a top
- You cannot know at the time — cycle turns are only identifiable in hindsight, usually months after the fact. The bottom of March 2020 was recognisable as a bottom by around the middle of that year, not on the day it happened, and expensive markets have historically stayed expensive for years before turning. The more useful question is whether your plan survives being wrong about where in the cycle you are.