Market levels or single valuation metric of a broad market doesn’t tell much about return potential of all stocks in the market. It is market of stocks and not one stock market. What it means is, there are 100s of companies listed that might be at different stage in cycle. Individual stocks may have more upside potential than narrow index like Nifty 50 or Sensex 30.
A stock price moves in lines with earning growth. Even though all stocks move in same direction in short term, their trajectories vary over longer timeframe.
Let’s assume the worst period with the benefit of hindsight when Nifty peaked in Dec’07 and 3 years after that.
If we observe individual stocks, we can see that markets made high in Dec’07, went through correction of 50%, and recovered in Dec’10. During this period Nifty was flat but more than 40% of stocks earned positive returns. Out of 185 large and mid-cap stocks (BSE Group A), 78 were positive, and more than half earned >13% CAGR. Together these 78 stocks earned >17% CAGR.
This proves a point that market levels must be used only in context of asset allocation to reduce equity and add to debt. If one can find enough bargains with good future prospects, he can remain invested.