Mumbai: September-end usually marks the close of the second quarter in India. But over the past two years, it has acquired another significance for markets. It was around this time in 2024 that a record-breaking bull run abruptly ran out of steam, giving way to a prolonged period of uncertainty.

Last week marked two years since that turn. Since then, Indian equities have been through a testy phase: long stretches of a slow grind, punctuated by sudden surges and equally sharp reversals.

A 24-month period of modest or no returns, or even losses, is long enough to test the patience of investors who have grown used to long bull runs interspersed with short-lived routs since Covid. What has kept things interesting, though, are the strong intermittent bursts in pockets such as mid- and small-cap stocks. These moves have challenged even seasoned investors, but have also provided enough action and encouragement to keep the equity cult among retail investors going.

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Fund managers publicly describe this as a stock-picker's market. That description may be masking an uncomfortable reality: returns have become increasingly difficult to generate.

The chatter on the sell side is that several money managers are giving greater weight to technical and quantitative signals, rather than relying predominantly on earnings prospects and fundamentals, in deciding what to buy and sell. Few fund managers would readily admit to such an approach, given that they prefer to be seen as conviction-driven stock-pickers rather than traders chasing price signals.

The trade-off may be hard to ignore: keep the returns table ticking by adapting to a market where winners can change abruptly or stick with conviction bets for a longer period even when they do not deliver. This balancing act has become even more challenging because of modest foreign investor appetite for Indian equities, elevated global bond yields and higher oil prices.

The numbers capture just how unusual this phase has been. Since the end of September 2024, the Nifty has declined 11.6% and the Sensex 13.6%. Yet the Nifty Midcap 150 is up 0.3%, the Nifty Smallcap 250 is down 1.3% and the Nifty Microcap 250 is up 2.8%, helped by the sharp rebound from the lows in April.

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There has been one silver lining from this prolonged period of underperformance: some of the valuation froth in Indian equities has come off. The Nifty now trades at a Price to Earnings (PE) ratio of 20.9 times, below its five-year average of 23.5 and 10-year average of 23.

The cooling-off is also visible beneath the surface, though valuations remain higher there. The Nifty Midcap 150 trades at 31.1 times, down from 45.8 two years ago and below its five-year average of 37.3 and 10-year average of 33.5. The Nifty Smallcap 250, at 31.7 times, is also well below its five-year average of 37.7, though it remains above its 10-year average of 28.3.

India's valuation against major markets has also narrowed. On a forward earnings basis, the Nifty trades at 18.5 times. That puts India below the Nasdaq at 31.1 times, the S&P 500 at 21.5 times and the Dow at 21.2 times in the US, as well as Taiwan's and Japan's 21.5 times. That is quite a change from September 2024, when India was among the world's most expensive major markets other than the US.

Does this mean India has become a screaming buy? For many global strategists, stocks here, especially large-caps, are much better placed today than in 2024, but what is still lacking is a concrete trigger. Take Taiwan, a key market that has stolen India's thunder recently. It is more expensive than India, but global investors appear fine with that because of the AI wave. Meanwhile, the US, among the most expensive markets in the world, continues to be seen as difficult to replace in an increasingly uncertain world.

For investors at home, the lesson from the past two years is that the easy-money phase of the bull market may be behind us. But that does not mean there is no money to be made in this market; it's just not everywhere, and certainly not all the time.