Earnings per share (EPS) and price-to-earnings (P/E) multiples drive stock prices, with earnings mattering in the long term and valuations in the short term, Kotak Institutional Equities said, arguing that investors' focus on market flows has diverted attention from value.
"Earnings are relevant in the long term and multiples in the short term for stock prices," the brokerage said in a latest note, explaining that changes in earnings expectations affect future EPS estimates, while changes in expectations about future prospects affect P/E multiples.
"An investor will buy based on positive changes to expectations and sell based on negative changes to expectations-buying or selling follows the change in expectations," Kotak said.
The brokerage said stock prices reflect the market's aggregate view at a given point in time. A discounted cash flow (DCF) framework helps explain price movements, as market expectations of future cash flows, the discount rate linked to prevailing sentiment, or both, can change.
Kotak argued that the "inordinate focus" of market participants on flows, ownership and prices has diverted attention from value, "the only relevant issue in investing".