Is 20× earnings cheap? The fair-multiple arithmetic

The Nifty’s trailing price-to-earnings multiple is now close to 20×, with the latest reported earnings taking index EPS past ₹1,178. The 10-year rolling average P/E has drifted up to roughly the same zone, so the index trades near its own recent history.

Is 20× cheap? The arithmetic says no. An index earning about 15% on equity and growing earnings 10–12% a year supports a fair multiple somewhere between 16.5× and 18×. Twenty is above that band: closer to fair than to cheap, and well below the mid-20s readings that marked the 2021 and 2024 tops.

Why 10–12% is the growth anchor, rather than something higher: broad revenue growth for the whole market is tethered to nominal GDP plus exports. India’s nominal GDP has compounded 10–12% across most 5-to-20-year windows, and export growth in rupee terms sits in a similar range. Individual companies can outgrow that ceiling; the whole market cannot. With profit margins already near cyclical highs (about 8% for the NSE 500 ex-financials), broad earnings growth roughly tracks revenue growth, 8–12%, rather than compounding above it.

That chain has a practical implication for return expectations: equity returns approximate earnings growth plus or minus valuation change. From a multiple slightly above fair value, sustained valuations would let returns track earnings growth; any de-rating would subtract from it. Costs, slippage and taxes take a further 0.5–1% a year. Anyone assuming comfortably double-digit returns from here is quietly assuming the multiple expands from a level already above fair value.

What we’ll watch: whether Q2 FY27 earnings keep index EPS compounding near the top of the 8–12% band, and where the trailing multiple settles relative to the 16.5–18× fair-value zone as those earnings land.