Rich valuations can trip investors; look for stock-specific opportunities

With the Sensex trading at a trailing price-to-earnings (P/E) ratio of 29 currently, market participants have begun to worry about rich valuations. Experts have warned that the headline index has crossed the P/E of 26 only thrice—in April 2000, December 2007 and March 2019. The market had crashed each time on the earlier two occasions. Fears are being expressed that it may do so again.

Valuations are rich in large-cap space: The Nifty is trading at a trailing P/E of 29.33, around two standard deviations above its 10-year mean. On a one-year forward basis, it is trading at over 19 times