Coffee Can Newsletter – March, 2018

Several factors affect short-term share price performance but (see Exhibit 1) earnings are the biggest driver of stock market returns over the long term. However, over the three-year period of FY15-18 (until 28 Feb 2018), the Sensex Index has registered a 7.1% CAGR despite delivering -0.6% earnings CAGR (i.e. declining earnings). This led to Sensex’s trailing P/E increasing from 19x to 24x over this three-year period as a gap opened up between the Sensex price trajectory and the Sensex earnings trajectory over the past 3 years.