Stock Market Strategy: Nifty in buy zone at 22,500; Overweight on consumption, healthcare, telecom: Emkay Global analyst

The Indian stock market is expected to remain volatile through the first quarter of CY2025, but a recovery is likely from Q1FY26 (April-June 2025) as earnings stabilize and global uncertainties ease, analysts said.

Seshadri Sen, Head of Research and Strategist at Emkay Global, the firm noted that the Q3 results season was muted, with single-digit PAT growth for the Nifty 50 and BSE500. While the performance marked a sequential improvement, it triggered another round of earnings downgrades, though less severe than in October 2024.

The Nifty 50 index posted a 5% YoY net profit growth, marking the third consecutive quarter of single-digit earnings expansion since the pandemic. Five companies — Bharti Airtel, State Bank of India (SBI), ICICI Bank, Hindalco Industries, and Reliance Industries — were the key contributors to earnings growth, while Coal India, ONGC, Tata Motors, JSW Steel, and IndusInd Bank negatively impacted earnings.

Earnings Downgrades Continue, But Stabilization in Sight

Despite expectations of stability, earnings forecasts continued to be revised downward. Consensus estimates for Nifty FY26 earnings per share (EPS) have been cut by 3.9% since January 1, 2025. More than one-third (36%) of the 491 companies tracked by analysts saw EPS cuts of over 5%, compared to 40.2% in October-November 2024.

“The expected stability in earnings forecasts has not played out yet. We maintain that the downgrade cycle is largely done, especially if there is a consumption recovery in FY26 based on easier monetary policy and improvement in employment trends,” Sen said.

Valuations and Market Trends

The recent correction in small- and mid-cap stocks (SMIDs) has removed excess froth from valuations, with the Nifty 50 now trading at a 1-Year Forward P/E of 19.3x, close to its 10-year long-term average (LTA). The Nifty MidSmallcap400 Index P/E has also dropped to 30.1x (TTM), below its LTA of 37.9x.

The number of BSE500 stocks trading below 30x trailing P/E has risen from 30.4% at the end of September 2024 to 39.4% post-correction, Sen noted. This suggests valuations are moderating but have yet to reach rock-bottom levels.

Institutional flows, however, remain stable, with domestic investments holding firm and foreign portfolio investor (FPI) selling easing. Sen attributes the YTD 3.4% decline in the Nifty 50 more to earnings downgrades and valuation adjustments rather than to institutional outflows.

Market Strategy and Outlook

Emkay Global analyst expects the Nifty 50 to find strong buying interest at around 22,500, with a target of 25,000 by December 2025. The firm anticipates a market pivot toward consumption-driven sectors, with discretionary consumption, healthcare, and telecom being the preferred overweight (OW) sectors. Meanwhile, financials, materials, and staples remain underweight (UW).

According to Sen, the stock market recovery from Q1FY26 is expected to be driven by three key factors:

1. Reduced Trade Concerns: The market will gain clarity on potential trade policies, with concerns over Trump tariffs likely easing.

2. Earnings Stabilization: The earnings downgrade cycle is nearing completion, with Nifty FY26 EPS growth estimated at 12-13%.

3. Consumption Revival: Signs of recovery in discretionary spending should start emerging, supported by easier monetary policies and improving employment trends.

With valuations moderating and earnings downgrades slowing, the Indian stock market is expected to stabilize over the coming quarters, presenting a buying opportunity for long-term investors.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.