The search for a stock market alternative

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

Not so long ago, India’s Nifty 50 index was outperforming the S&P 500 for this year.

But an 8% rally in U.S. stocks since the big Aug. 5 sell-off has left the Indian benchmark in the dust.

While much of the American outperformance can be credited to markets realizing the U.S. economy remains strong, the lackluster performance of Indian equities has been chiefly due to its failure to positively surprise investors.

Earnings for Nifty 50 companies rose 3% in the first quarter over the past year. Stripping out banks and energy firms shows that the rest eked out earnings-per-share growth of 19% in the most recent quarter, compared to a year ago.

However, the stock market is a forward-looking beast, and the above was expected. In fact, only 21 out of the 50 companies that make up the index surprised investors. The rest simply couldn’t keep up.

Many analysts fear it won’t be long before nearly all of the market fails to outperform expectations. And even when a few companies do, it won’t matter much for investors’ total returns.

“We believe that potential beats in Autos, Industrials, Healthcare, and IT may not be enough to offset the misses in Financials, Metals, and Energy,” said Amish Shah, equity strategist at Bank of America. “Besides, slowing global growth is a risk.”

A possible slowdown in global economic growth, potentially leading to a fall in commodity prices, isn’t helpful for India. But it’s unlikely to derail its growth trajectory.

The South Asian nation has a consumer-led economy where exports aren’t yet a dominant feature. However, a fall in oil prices due to a global slowdown could prove beneficial as lower fuel prices contribute to higher discretionary spending for its citizens.

Since the stock market isn’t representative of the Indian economy — energy makes up a significant portion of the Nifty 50 while being a relatively small portion of the GDP — any hit to oil and gas firms’ earnings leaves investors with wobbling returns. GDP growth, meanwhile, might continue to stay the course.

Investors have also raised the bar for future growth with lofty projections. To meet expectations, Nifty 50 companies’ earnings per share would need to grow by 13% compounded annually for three years, according to Citi. This is a tall order, yet tepid from even frothier previous expectations.

“Earnings…