Stop tracking FII outflows: Why Kotak says valuations, not 'flows', drive stock prices

The brokerage house Kotak Institutional Equities, in its report dated October 12, 2026, pointed out that investors should focus more on company valuations, earnings expectations and business prospects than on daily investment flow trends.

As per the brokerage house, the excessive attention given to market flows, share ownership and price movements has distracted investors from the most important question, that is, whether a stock is worth its current price. "We reiterate that 'flows' are irrelevant for stock price movements," said Sanjeev Prasad, MD & Co-Head of Kotak Institutional Equities.

He added that, "a stock price is simply the aggregate view of the market at a point in time. Any change in expectations about earnings will change future EPS estimates, and any change in expectations about future prospects will change P/E. 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 in its report argued that without understanding a company's underlying value, investors risk buying stocks simply because prices are rising or selling them because prices are falling.

Here is a detailed analysis of the Kotak perspective on what really drives share price movements and what investors must watch out for -

Why Kotak questions the market flow theory

Kotak argues that buying and selling in the secondary market does not, by itself, explain why stock prices change.

When one investor sells shares, another investor buys them. The transaction transfers ownership of the shares and cash between the two parties, but it does not change the company's total number of outstanding shares.

The brokerage noted, "As a corollary, investors can stop attributing market movements to 'flows', lamenting FPI outflows or fretting about domestic inflows."

Can money really move between stocks and sectors?

Investors often hear that money is moving from information technology stocks to banking shares, or from large-cap companies to mid-cap and small-cap stocks. Kotak questions whether such explanations adequately describe market behaviour.

According to the brokerage report, transactions involve buyers and sellers exchanging shares and cash. Differences in stock performance are better understood by examining company fundamentals, valuations and changing investor expectations.

Do large IPOs drain money from the stock market?

Initial public offerings (IPOs) are sometimes blamed for reducing liquidity in the secondary market, where investors buy and sell already-listed shares. Kotak argues that this explanation also overlooks the role of valuations and investor demand.

According to the brokerage, "We would ignore market worries about large IPOs affecting liquidity (whatever that may mean) in the secondary market for the aforementioned reasons. Money cannot 'move out' of the secondary to the primary market, as there is no money in the secondary market anyway."

The report also noted that India's annual household financial savings are substantially larger than IPO issuances, while foreign portfolio investors have participated actively in the primary market.

Earnings and valuations: What really drives stock prices?

Kotak identifies earnings expectations and valuation multiples as the key factors influencing share prices.

The brokerage added, "Earnings are relevant in the long term and multiples in the short term for stock prices."

If investors expect a company to earn more in the coming years, its estimated earnings per share could rise, supporting a higher share price. However, if investors become less willing to pay a premium for those earnings, the price-to-earnings multiple may contract.

Kotak added, "Without the anchor of value, market sentiment will reflect, and investing will largely comprise chasing rising or falling prices."