Why can we expect a Stock Market Crash in Days to come

Nifty as well as Sensex have managed to post exceptional gains each years post the crash of 2008-09.
But due to global uncertainty and Fed Rate Hike fears have made 2015 a pale year for the markets as till date the Nifty still trades negative with respect to the close of last Year.

This year during early September Nifty had already tested 7700 and from thereon has managed to bounce back quite significantly to levels of 8300, but due to the disappointment in Q2 results by most of the companies Nifty again has started to show signs of weakness.

Here is the key fundamental reasons why Sensex might test 22000 in the near future



 Earnings and P/E Ratio

The in the earnings has led to the rise in the P/E Ratio. The historical avg P/E of the Sensex stands at 18, whereas currently the P/E ratio of Sensex is at 21.

At P/E of 21 the yield becoms less than 5%, which undoubtedly makes Bank Deposits much more profitable as well as Risk free compared to the Index Funds. 

The current EPS of Sensex being at 1306 and assuming that the Sensex will move towards the average P/E then Sensex can slide to levels closer to 23500-22000 where Sensex turns out to be fairly valued.

The Fed Rate Hike being on the cards the fund outflows might weigh on the Markets. Yet the business fundamentals will remain to be strong and stable, hence there may be a quick recovery even if Sensex crashes to 22000 which is about 30% low from its all time highs.

This doesn't mean that markets can start crashing tomorrow or day after, this may take a little while may be few months or couple of years, but further if the earnings pick up then the current Price might justify for a higher P/E ratio, At current scenario a crash seems more likely

Data Source: BSE India