India's Stock Valuation Advantage Over the U.S. Vanishes After 15 Years

After a five-month decline, the Indian stock market has lost its long-held valuation advantage over the U.S. For the first time since 2009, the BSE Sensex is trading at a lower price-to-earnings (P/E) ratio than the Dow Jones Industrial Average, as per Bloomberg data.

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Currently, the Sensex has a P/E ratio of 21.8, down from 23.8 in March 2023. In comparison, the Dow's P/E ratio stands at 22.4, a slight decrease from 22.8 a year ago.

Traditionally, the Sensex has maintained an average valuation premium of 25% over the Dow, owing to India’s higher growth prospects. However, recent trends have shown a divergence in valuations. Since reaching a post-pandemic peak of 26 in March 2022, the Sensex’s P/E ratio has steadily declined, whereas the Dow’s P/E has surged from a low of 15.6 in September 2022.

According to Business Standard, analysts attribute this shift to stronger earnings growth in the U.S. compared to India over recent quarters.

During the October-December 2024 quarter, corporate earnings in the U.S. grew by 16%, whereas Indian firms reported a comparatively modest 6% increase. Projections suggest that U.S. earnings will continue to outpace India's throughout 2025, with India's earnings expected to grow at 11% in FY26.

Dhananjay Sinha, co-head of research and equity strategy at Systematix Institutional Equities, told Business Standard that the slower earnings growth in India has prompted foreign investors to reduce their exposure to Indian stocks, reallocating funds to markets such as the U.S., China, and Western Europe.

Since September 2023, foreign portfolio investors (FPIs) have pulled out approximately ₹2.5 trillion from Indian equities, leading to a 12% drop in the Sensex. Meanwhile, the Dow has remained relatively stable.

Over the past year, the earnings of the top 30 U.S. companies (Dow constituents) increased by 8.9%, while Sensex-listed companies saw a 10% rise. However, due to the depreciation of the Indian rupee, this translates to just 5.6% growth in U.S. dollar terms, making Indian equities less appealing to global investors.