Seasoned investor in equity markets would be well-versed with the old maxim, “Sell in May and go away.” In the past, there have been years when foreign investors in particular have dumped or sold stocks in the month of May, and it has had a negative impact on the market.

However, since 2013, speaking about the Indian equity market, only twice out of twelve instances the BSE Sensex has clocked negative returns in May. As regards the US equity market, the S&P BSE 500 has clocked negative returns only once in the last twelve years.

Hence, the question arises is this adage, “Sell in May and go away,” really relevant in current times where a lot of retail investors are participating in the equity markets in the quest to generate better returns than some of the traditional investment avenues?

Performance of Equity Markets in May

Month-Year	Indices Returns (%)
	BSE Sensex	S&P 500
May-13	1.31	2.08
May-14	8.03	2.10
May-15	3.03	1.05
May-16	4.14	1.53
May-17	4.10	1.16
May-18	0.46	2.16
May-19	1.75	-6.58
May-20	-3.84	4.53
May-21	6.47	0.55
May-22	-2.62	0.01
May-23	2.47	0.25
May-24	-0.70	4.80
May-25	?	?

(Source: ACE MF, data collated by PersonalFN) 

In the past, the money from selling in May used to be deployed usually in debt and fixed-income securities and then again investors entered or bought equities in the latter half of the year. Or what some investors do is trim down their positions and rotate to economically less sensitive stocks during May.

Will Old Adage Hold True in May 2025?

Well, a fact is this time with the US treasury yields inching higher, due to weakening the US Dollar (USD) and the US economy having contracted for the Q1 of CY2025 – marking the first decline since the Q1 of 2022 and a sharp reversal from 2.4% growth recorded in the previous quarter – foreign investors have a reason to sell equities in May and consider investing in bonds and other fixed-income instruments.

Moreover, the macroeconomic and geopolitical conditions are such that volatility is high. As you know, during volatile market conditions, the chances of drawdowns (or downside risk) are also high with investors, by and large, panicking.

After Donald Trump’s victory in the US Presidential elections and inauguration earlier this year, volatility has spiked in view of the protectionist policies, particularly, steep reciprocal tariffs. While there is a 90-day hold on the reciprocal tariffs currently – which is boding well for the equity market currently – one needs to see what happens when this period ends on July 9, 2025.

If steep reciprocal tariffs stay, this could result in a potential trade war and the US could slip into a recession. Meaning, the US could report another sequential quarter of negative GDP growth. The chances of a recession in the US are high, given Trump’s tariff tantrums and other protectionist policies.

Earlier, in the first week of April, after Trump announced steep reciprocal tariffs on several countries, it did weigh down on the equity markets. Assuming steep reciprocal tariffs stay after July 9, the sell-off could be more pronounced and the ripples of it may be seen in the other emerging markets.

Whether the sell-off will be followed by a V-shaped recovery or it will take longer for the market to recover is difficult to say given the gravity, and complexity of Trump 2.0 policy announcements plus its potential impact on global trade, macroeconomy, and geopolitics.

Geopolitical Risk Has Increased Since 2021 With Multiple Conflicts

(Source: RBI Bulletin, April 2025) 

At present, geopolitical risks are looming with tensions in the Middle East (between Israel and certain militant groups of the region who are supported by Iran), more than 60 vessels being attacked by Houthis — a militant group supported by Iran, relations are strained between the US and China, China and Taiwan, there have been skirmishes between China and India at the Line of Actual Control (LAC), and very recently Pakistan has been on the offensive in the Kashmir where 26 tourists were killed by terrorists in Pahalgam on April 26.

Since then, the Pakistan troops have been continually violated and firing small arms from posts across the Line of Control (LOC). Indian troops too are responding to it appropriately, but after “full freedom” granted by Prime Minister Narendra Modi to armed forces in the recently held security meeting, a more aggressive calibrated attack is expected from India. Several nations have expressed condemnation of the terror attack by the Pakistan-based militant group.

The Reserve Bank of India (RBI) has pointed out that geopolitical conflicts remain one of the top risks to financial stability.

Even the International Monetary Fund’s (IMF’s) recent report on financial stability highlights this fact. It says geopolitical risk can affect the prices of financial assets through an increase in uncertainty and disruptions to trade and financial transactions, which can be mutually reinforcing.

So, the geopolitical and macroeconomic environment is also likely to weigh on the market sentiments besides the fact corporate earnings would unfold.

Corporate Earnings Are Under Pressure

Corporate earnings of India Inc. have entered a slow lane or a cyclical downturn. It is not just the bottom lines, certain companies have reported a revenue slowdown as well.

In Q3FY25 there were more misses than hits in India’s corporate earnings. As per a report by Motilal Oswal Financial Services, the earnings upgrade to downgrade ratio was 0.3x—the worst in more than five years. What it means is that for every company whose projected earnings were upgraded, there were nearly 4 that their earnings downgraded. In other words, more companies have missed meeting the street estimates. Only a few companies from respective sectors such as BFSI, healthcare and telecom have posted decent results.

Now given the recent headwinds in play for the market, particularly Trump’s tariff tantrums and other protectionist policies, it is likely that corporate earnings would be disappointing even going forward if steep reciprocal tariffs stay.

Certain companies being cognisant of looming uncertainty around reciprocal tariffs have scaled back their capital expenditure plans or chosen to defer their plans.

Trump’s reciprocal tariffs are likely to hurt export-oriented sectors such as agriculture, auto, metals, petroleum products, chemicals, medical devices, healthcare, jewellery, textile, and IT among others.

Amidst rising input costs, companies may find it challenging to protect margins. Consumption is anyway slowing down, particularly in discretionary goods and services.

Disappointing corporate earnings would be the biggest risk for the Indian equity market, as ultimately the earnings justify the valuations.

You see, although India’s long-term economic outlook seems bright, there isn’t always a direct correlation between the two, as companies go through cycles. At present, the dichotomy between corporate earnings growth and India’s GDP growth is very much apparent.

At present it is domestic investor (retail, HNI, UHNI, and institutional) participation that is keeping the Indian equity market afloat.

Retail investors and HNIs, ideally, should not get carried away by the sharp up-move of the market in April following the Trump 2.0 administration putting a 90-day hold on reciprocal tariffs.

Particularly when there are ostensible clouds of global economic uncertainty and geopolitical tensions you ought to be careful.

Valuations in the Indian Equity Market are Expensive

Currently, the trail Price-to-Equity (P/E) ratio of the MSCI India Index is around 25x, while that of the MSCI Emerging Markets Index and MSCI World Index trail P/Es are around 15x and 21x (as per the latest available factsheets as of March 2025).

Given that the bellwether BSE Sensex has moved up +6% in April 2025, it is likely that the MSCI India Index may have moved up even beyond 26x.

Even on a 12-month forward P/E, the MSCI India Index with a P/E of nearly 21x is commanding a noticeable premium vis-a-vis the world and emerging markets that are around 18x and 12x, respectively.

In the case of midcaps and smallcaps, the valuations are relatively even more expensive after a sharp increase in inflows.

The MidCap-to-Sensex ratio stands at approximately 0.53, noticeably above its long-term median of 0.45. Similarly, the SmallCap-to-Sensex ratio is around 0.59, also above its long-term median of 0.47 (as of March 6, 2025).

Although these ratios have dwindled since the start of CY2025, they cannot be considered reasonable yet. It indicates that the froth in the mid-cap and small-cap segments is still to fully settle.

How to Approach Indian Equity Markets Now?

To make fresh investments, utilise the significant market declines to make staggered lump sum investments, or even better, make SIP investments particularly when you are planning for certain envisioned financial goals.

To plan for long-term financial goals, Systematic Investment Plans (SIPs) infuse the necessary discipline, help you focus on time in the market (rather than timing the market), mitigate the volatility with rupee-cost averaging, and compound your hard-earned money.

If you have ongoing SIPs in some of the best mutual fund schemes, avoid pausing/discontinuing them when the market corrects or is very volatile, as it could put brakes on the process of compounding.

Follow the Core & Satellite Strategy When Investing in Equity Mutual Funds

The core & satellite approach is followed by some of the most successful equity investors around the world.

The term ‘core’ refers to stable holdings that have the potential to multiply wealth over the long term. Ideally, for the core portion (65%-70%) of your equity mutual fund portfolio, you may consider some of the best Large Cap Funds, Flexi Cap Funds, and Value/Contra Funds. But make sure to keep an investment horizon of at least 5 years.

The term ‘satellite’ refers to holdings with a high wealth multiplying potential with relatively higher risk. The satellite portion (up to 30%-35%) of your equity mutual fund portfolio may include a couple of best Mid Cap Funds (max 2) and an Aggressive Hybrid Fund. These could push the overall returns of your equity mutual fund portfolio, but make sure to have an investment horizon of at least 7-8 years for the schemes in the satellite portion.

Apart from equity for wealth creation, allocating sensibly to debt & fixed income instruments and gold would also be meaningful. Adequate prudent exposure to these two asset classes may add some stability to your portfolio when equities undergo turbulent times or drawdowns.

For tactical asset allocation to equity, debt, and gold, you may consider some of the Multi-Asset Allocation Funds.

Last but not least, be realistic with your risk-return expectations and ensure that the investments you make align well with your risk profile, broader investment objective, the financial goal/s you are addressing and the time in hand to achieve those envisioned goal/s.

Be a thoughtful investor.

Happy Investing!

This article first appeared on PersonalFN here