Harish Krishnan, CIO – Equity at Aditya Birla Sun Life AMC, has warned that elevated US yields may prove a tougher headwind for richly valued mid- and small-cap stocks than for the broader market. In a conversation with ETMarkets' Kshitij Anand, he said the current market environment is increasingly forcing investors to separate momentum from genuine quality, with valuation discipline likely to become more important as global rates remain sticky.
The message comes at a time when Indian equities have seen strong participation beyond the large-cap universe, even as concerns build around stretched valuations in pockets of the broader market. Krishnan's view is that the impact of higher US yields is not uniform. Companies that are priced for perfection, especially those without strong earnings visibility or durable cash generation, are more vulnerable when the global discount rate rises. That makes the mid- and small-cap segments, where enthusiasm has often outrun fundamentals, more exposed to a correction in sentiment.
Yields Raise Valuation Risk
Krishnan's core argument is rooted in valuation mathematics. When US yields rise, global investors typically demand a higher return from risk assets, which compresses the present value of future earnings. That effect tends to be felt most acutely in expensive stocks whose valuations depend heavily on distant growth assumptions. In practical terms, the more a company's market price is built on expectations rather than current profitability, the more sensitive it becomes to shifts in rates and liquidity.
For Indian investors, this is especially relevant in the mid- and small-cap space, where the rally has often been broad-based and momentum-driven. Krishnan suggested that the market may increasingly reward businesses with visible earnings trajectories, strong free cash flow and high return on capital, rather than those benefiting only from narrative strength or speculative flows. His comments reflect a broader shift in market leadership that often follows periods of easy liquidity and strong risk appetite.
Quality Over Momentum
A central theme in Krishnan's remarks was the danger of confusing momentum with quality. In bull markets, stocks can rise sharply because of sentiment, index inclusion, thematic enthusiasm or retail participation, but that does not necessarily mean the underlying business is improving at the same pace. He argued that investors need to look beyond price action and assess whether a company can sustain growth through cycles.
That distinction matters because momentum can reverse quickly when macro conditions tighten. If borrowing costs stay elevated and global liquidity becomes less supportive, businesses with weak balance sheets or inconsistent cash generation may struggle to justify premium valuations. By contrast, companies with strong operating leverage, disciplined capital allocation and resilient demand can better absorb a tougher macro backdrop. Krishnan's comments suggest that the market may be entering a phase where fundamental scrutiny will rise and indiscriminate buying will become less effective.
Earnings Will Drive Returns
Krishnan also pointed to earnings quality as a key filter for investors. He said return on capital, cash flows and the durability of profits will become increasingly important in determining which stocks can sustain outperformance. That is a notable shift from environments where multiple expansion alone can drive returns. In a more selective market, earnings growth must be backed by business quality, not just optimism.
The broader implication for portfolio construction is clear: investors may need to tilt toward companies with proven execution, pricing power and balance-sheet strength. Sectors and businesses that can convert revenue growth into real cash earnings are likely to command greater confidence. Conversely, richly valued names that depend on perpetual re-rating may face greater scrutiny if global rates remain elevated.
For the Indian market, the warning is timely. Domestic growth remains a structural support, but global rate trends can still influence capital flows, risk appetite and valuation multiples. Krishnan's assessment suggests that the next phase of the market may be less about chasing the fastest risers and more about identifying businesses that can compound capital through earnings discipline. In that sense, rising US yields may not just be a macro variable; they may become a test of how much of the recent market enthusiasm was built on fundamentals, and how much on momentum alone.