‘Nifty could end 2025 with 10-20 per cent upside from here’

The stock market outlook for 2025 is marked by significant uncertainty and challenges, particularly amid the ongoing correction. As of February 2025, the market has experienced substantial turbulence, with the BSE Sensex declining about 7.5 per cent since mid-December 2024, and small-cap and mid-cap indices witnessing significant declines of 21 per cent and 19 per cent, respectively.

The Economic Survey 2025 warns of potential cascading effects from a US market correction, which could impact India due to elevated valuations and optimistic sentiments in the US.

Additionally, Donald Trump’s tariff policies pose a risk, which can potentially impact India’s GDP growth by 0.1-0.6 per cent. The persistent weakness in the market is exacerbated by aggressive selling by FIIs, who have offloaded stocks worth over ₹3 lakh crore since October. Despite these challenges, we believe India has the potential to outperform if fiscal policy in the US weakens and the government negotiates on tariffs rule

The Q3FY25 results for Indian companies presented a mixed bag, with sectoral performances varying significantly. The BFSI sector led the charge with a healthy growth in net profits, driven by strong performances from PSU banks. Technology, telecom, healthcare, capital goods and real estate also contributed positively to earnings growth, with real estate posting a remarkable increase. However, sectors such as automobiles, cement, consumer and oil & gas faced profit declines, with cement experiencing a sharp drop.

Sales growth across sectors showed improvement, with non-consumer services and manufacturing sectors witnessing notable increases. Despite these mixed results, the overall net profit growth was in double-digits, albeit lower than the previous year. Factors such as revival in rural demand, government spending and moderation in input costs are expected to boost Q4FY25 results. Additionally, the impact of Budget 2025 measures, including tax cuts and increased capital expenditure, is anticipated to positively influence earnings in the next financial year. While global uncertainties and geopolitical tensions pose risks, sectors with strong fundamentals are likely to drive market resilience and growth.

The recent stock market correction in India has been sector-specific, with certain sectors experiencing more significant declines than others. The small-cap and mid-cap indices have been particularly hard hit since December 2024. The IT sector has also faced challenges due to concerns over US stagflation and tariffs, leading to sharp falls in IT stocks. In contrast, sectors like FMCG have seen relatively less severe declines, with companies like ITC experiencing a 15 per cent drop YTD.

The correction is attributed to several factors, including valuation concerns, weak corporate earnings and global economic uncertainties. Additionally, the outflow of FIIs has exacerbated the situation, with total outflows reaching ₹1.25 lakh crore YTD. The decline in the rupee and threats of US tariffs have further contributed to the negative sentiment. Overall, while some sectors have been more resilient, the broader market correction reflects a complex interplay of domestic and global economic challenges.

The current valuation of the Indian stock market reflects significant erosion, with the market capitalisation dropping below $4 trillion for the first time in over 14 months, marking a decline of about 18.33 per cent in 2025. This sharp correction has been driven by a combination of factors, including a weakening rupee and market fatigue following a strong run in the last one-two years. Currently, Nifty 50 valuation multiple has decreased to 19x one-year forward earnings, down from 21.3x at its peak in September 2024.

Despite the challenges, we believe the current valuations are reasonable and predict a potential recovery by the end of 2025, with forecasts suggesting the Nifty could end the year with 10-20 per cent upside from here. Overall, while the current outlook is cautious, there are indications that the market may stabilise and potentially rebound as economic and earnings growth improve.

Recently, the RBI cut the repo rate by 25 basis points to 6.25 per cent, marking its first rate reduction in six years. Lower interest rates, typically, boost consumer spending and investment, potentially benefiting rate-sensitive sectors such as banking, real estate and autos. The RBI’s liquidity measures, including open market operations and adjustments to the cash reserve ratio also influence market dynamics by affecting the availability of funds for investment. We believe the RBI’s policies will aim to balance economic growth with inflation control.

For 2025, we have several mega themes for the stock market, which are poised to drive investor’s investment decisions going ahead. We believe the financial sector is expected to dominate due to its long-term growth potential despite macroeconomic challenges, while IT and pharmaceuticals will also emerge as strong contenders for investment. Also, manufacturing, tech platforms and higher-end consumption are gaining traction, with potential for stock re-ratings in these sectors. Besides, electric vehicles, green energy, data centres and infrastructure can be transformative themes driving India’s economic growth.