Compare P/E ratios with crypto market valuations and uncover the truth behind the rally
The Indian equity market has hit record levels in April 2025, with benchmark indices like the BSE Sensex and Nifty 50 riding high to their all-time peaks. With this historic rally, debates have emerged as to whether valuations at the stock market-risen levels can be justified by fundamentals or whether early signs of overheating are beginning to show up especially in the mid- and small-cap segments.
Market Overview
Closing on April 21, 2025, the Sensex had registered an upward move of 843 points for the day to close at 79,396.30. Nifty 50 gained a total of 270 points, closing at 24,121.20. Such levels definitely are driving strong hopes among investors buoyed by robust domestic liquidity, continued foreign inflows, and better-than-expected corporate earnings in the financial and IT sectors. Rising concerns, however, come regarding whether the buoyancy is underpinned by fully solid fundamentals or not.
Understanding Valuations: The P/E Ratio Lens
The Price-Earning (P/E) Ratio is a metric which focuses on how the stock markets are valued. It illustrates as to how much the investors are willing to pay per rupee earned out of listed companies into their account.
The Sensex, as at the mid-April 2025, was trading at a price-to-earnings (P/E) ratio of roughly 21.5, just marginally above the long-term average but much less than historical peaks, such as when it achieved 36.2 at the beginning of 2021. The P/E ratio of the Nifty 50 was near 21.7-on its own, relatively high but not too much to fret over.
However, the ugly head really raises its profile when you tend to look at the broader market. More highly-valued are the Nifty Midcap and Smallcap indices. The forward 12-month P/E ratio for small-cap stocks has jumped to approximately 24.5, compared to its 10-year average of 16. Similarly, the mid-cap index is trading at 35.8 times its estimated earnings, far exceeding its 10-year average of 22.4.
So elevated valuation multiples in mid- and small-cap stocks insinuate that these names are aggressively priced relative to their own historical norms. For example, earnings growth has been bumpy for these segments by indicating something between overvaluation and strong causes of concern.
Earnings Factor: Is Reality Catching up with Fundamentals?
Earnings growth will always remain part of the rationale for buoyant stock prices. But if one were to look at the company’s recent history of corporate earnings, a rather mixed picture comes out. During the quarter October to December, FY 25, the Nifty 50 companies reported an earnings growth of around 5 percent, which also happens to be the third successive quarter showing growth at single digits in corporate profitability. One would also state that rising input costs with interest rate increases and global macroeconomic uncertainty are weighing on several sectors with regards to margins.
The divergence between price performance and earnings growth becomes a critical indicator. While the indices have been scaling new highs, earnings momentum has not kept pace, especially among mid- and small-cap stocks. This disconnect raises valid concerns about whether current valuations can be sustained.
Meanwhile, an increasing divergence between price performance and earnings growth stands out in importance. The indices have hit new highs, but earnings revival seems to be trailing well behind, particularly in mid-cap and small-cap stocks. This divergence raises genuine apprehensions about the possibility of sustaining current valuations.
Comparison with Cryptocurrencies: A Different Game
While equity markets have traditionally been judged by dividends and the P/E ratio, cryptocurrencies exist in an entirely different valuation paradigm.
The largest cryptocurrency, Bitcoin, is presently hovering close to $87,500 and has a total market capitalization of around $1.67 trillion. The second-largest cryptocurrency, Ethereum, is trading at a price of around $1,648 and has a market capitalization of nearly $197 billion, likewise.
However, unlike stocks, cryptocurrencies do not make profits or pay dividends. Therefore, valuation measures such as P/E ratios are not used. Investors assess value using other metrics like network activity, transaction volume, total value locked in DeFi protocols, and measures of user adoption. This means that, in this regard, crypto assets are largely speculative, with valuations hinging less on the ability to generate earnings today and more on sentiment in the market, scarcity, and potential future use.
That fundamental difference makes an equity comparison to cryptocurrency extra hard. Nonetheless, speculation in both arenas can be seen occurring during the bull cycles. In crypto, hype and expectation could see magnifying prices; in equities, those indistinguishable forces might be seen lifting overvalued stocks or sectors that rally against somewhat tepid earnings.
Speculation vs. Fundamentals
This makes speculation another major point of contrast between the two markets. Cryptocurrencies have always been seen as incredibly volatile markets, with speculative rallies. Halving cycles, institutional adoption stories, and regulatory news result in huge moves of capital either way.
Conversely, the equity markets, particularly in India, are very heavily influenced by domestic consumption stories, government policies, and monetary issuance. Certainly, speculation is a characteristic of stock markets, particularly in penny stocks and small-cap stocks, but the whole system has also remained anchored by institutional fundamentals such as earnings growth, dividends, and corporate governance standards.
It is in that context that, the mid- and small-cap boom in India today replicates the speculative rally often on show in crypto assets. Future growth is being priced into stocks with little visibility into actual earnings. This behaviour can be seen in renewable energy, fintech, and certain digital platform companies, where the valuation has gone far ahead of the financial metrics.
Macro Environment and Liquidity
The conditions of the economy have their effects too, especially on the equity market valuations. The environment proves suitable for equities owing to lower inflation, lower interest rates, and better-than-expected GDP growth. On top of these, the accommodative stance of the central bank, along with the high levels of domestic liquidity, has ensured sustained buying in quality stocks.
The growth in the cryptocurrency space comes mainly through expected institutional adoption from the U.S., with factors such as the potential approval of Ethereum spot-ETFs and the inevitable effect of Bitcoin’s 2024 halving likely to act as significant catalysts. The next few months are proving short-term speculative excitement, even though regulatory clarity remains to be seen.
Caution Warranted Despite Optimism
The Indian equity market shows signs of strength, but also caution. The large-cap stocks are showing fair value as per the historical averages; however, the mid-cap and small-cap segments appear stretched. A widening gulf between price and earnings growth raises bona fide concerns about sustainability.
Compared to this, the cryptocurrency market continues to operate on a high-risk, high-reward framework, largely speculative and driven by future expectations rather than tangible performance metrics.
One difference that stands out when comparing both asset classes is that traditional equities provide valuation benchmarks and regulatory safeguards, whereas crypto valuations are heavily time-dependent on sentiment and future narratives. Either way, the analysis has to be cautious and sound.
To summarize, the Indian equity market-no bubble per se but pockets of overvaluation, especially among the smaller segments. Investors need to be vigilant and mindful of quality, shunning speculation in either stock or crypto markets.
