A big learning from stock market experience is that the market’s long-term trend is largely predictable; but the short-term trend is almost impossible to predict. The long-term trend of the market is dictated by earnings; but in the short-term, many non-fundamental factors impact the market, rendering predictions almost impossible.
An interesting feature of the behavior of global equity markets this year has been their resilience despite serious geopolitical turbulence. Even wars didn’t trigger any significant correction in markets. Markets climbed all walls of worries that emerged from the geopolitical turbulence in May and June. In the mother market US, S&P 500 and Nasdaq set many new records this year. This resilience of global equity markets has been reflecting in the performance of the Indian market, too. Nifty has been oscillating between 24500-25500 since mid-May.
What are the possibilities of a breakdown below 24500 or a breakout above 25500?
More often, than not, triggers for correction come from unexpected developments. That’s the unknown area. An important event that can influence the market in the near-term is the outcome of the India-US trade negotiations. An interim trade deal is likely. The unknown element is the tariff rate that will be imposed on India. If the tariff rate is lower than 20 percent, that would be a positive. If it is much lower at around
15 percent, the market would respond positively since that would place India in an advantageous position vis-à-vis our trading competitors.
Negative news on the tariff front can impact the market pulling Nifty below the recent support level of 24500. But a sharp and sustaining correction appears unlikely since domestic buying can lift the market. A strong pillar of support for the rally which took the Nifty from the COVID low of 7511 in March 2020 to the recent peak of 26277 in September 2024 has been the active participation from domestic investors. Despite the FII selling, the market rallied. The sustained rise in the numbers of unique investors, demat accounts and SIP accounts have been a pillar of support for the market. The continuous fund flows into equity and hybrid funds enabled fund managers to buy every dip in the market. This trend can continue, providing resilience to the market.
However, a clear breakout above Nifty 25500, taking the index to higher levels needs fundamental support from earnings. This is the challenge which the market is facing now. After sharp spurts in earnings in FY21, FY22 and FY24, earnings growth turned tepid in FY25. For FY25 PAT growth was a pedestrian 5.6 percent for Nifty 500. For FY26 the present trend indicates only about 10 percent earnings growth for Nifty 50. This modest earnings growth potential cannot facilitate a sustained rally in the market.
Earnings are expected to grow beginning from Q3 FY26. India’s macros are strong – GDP growth is the best among large economies; fiscal deficit and current account deficit at 4.8 percent and 1 percent of GDP respectively are under control;
forex reserves are ample at around $700 billion, CPI inflation (2.1percent in June) is well within RBI’s target. The Government provided big fiscal stimulus through massive personal income tax cuts in the 2025 Budget and the MPC has complemented the fiscal stimulus with a 50 bp rate cut and 100 bp CRR cut in the June policy meet. This provides the ideal setting for an earnings recovery. President Trump’s tariff tantrums and the uncertainty that has triggered has impacted all economies including India. International trade has been impacted and exports are sluggish. This is a drag on the economy in the near-term but stability is expected to return after the initial chaos.
India’s strong macros will soon start reflecting in corporate earnings. This is likely to happen starting from Q3 when the banking sector starts reporting superior earnings benefiting from the CRR cut. Hopefully, credit growth too will start picking up soon responding to lower interest rates.
Elevated valuations in India, coupled with tepid earnings growth, is not a favorable market construct that can trigger and sustain a rally in the market in the near-term. This is the time to remain patient for better times, which are not far away.
First published in The Economic Times
