Analysts have been talking of a recovery in earnings for the corporate sector. The story is that, although the macro picture may have become tarnished a bit, what with a limping banking sector plagued by scandal, political uncertainty, higher oil prices and worries about a trade war, these negatives would be offset by a recovery in earnings. The macro story may be a bit frayed at the edges, but the micro is strong—so goes the pitch for Indian equities.

Unfortunately, that neat little story doesn’t seem to be borne out by analysts’ own earnings estimates. To gauge the weakness in sentiments, look at the recent two-year forward consensus earnings per share (EPS) estimates for the Nifty.

Earnings estimates for the Nifty took a knock after the long-term capital gains tax was introduced in the Union budget. While that was followed by some recovery, optimism has faltered again in the wake of recent events.

Indeed, currently the Nifty EPS estimate has fallen to a level lower than it was at the beginning of this calendar year.

“We have seen modest cuts in our FY2019 earnings estimates over the past week to factor in higher provisions for banks and lower revenues for telecom companies (including RIL’s telecom business)," said a Kotak Institutional Equities report dated 23 March.

The domestic brokerage firm cautions of further cuts to earnings estimates as banks will likely accelerate provisioning in the March quarter of fiscal year 2018 and the first half of the next fiscal year.

Also, higher crude oil prices and lower-than-anticipated goods and services tax revenue collection also pose downside risks to the country’s fiscal position and overall macro environment. That seems to be reflected at the micro level as well—why else would analysts be revising their earnings estimates downwards?

As for valuations, broad market valuations represent a mishmash of “high" valuations of private sector banks and consumer goods companies’ stocks and “low" valuations elsewhere broadly, reflecting high general uncertainty, added the Kotak Institutional Equities report.

Though the Indian equity market enjoys a premium over its peers in the Asia ex-Japan region, valuations are still on the higher side, considering the domestic concerns and need to correct further.

The risks of a double whammy of a downward revision of earnings and lower valuations should not be underestimated.