The Indian stock market has experienced a nearly 15% decline from its peak due to concerns over an economic slowdown and fears of a trade war under newly elected U.S. President Donald Trump. However, there are compelling reasons to believe that markets are nearing a bottom and
could perform well for the rest of 2025.
Key factors supporting this outlook include
- Earnings Growth Acceleration – Lower corporate tax rates and interest rate cuts are set
to drive stronger earnings growth. - Attractive Valuations – The NIFTY’s price-to-earnings (PE) ratio for FY26 stands at 20x,
which is in line with the 10-year median, suggesting reasonable valuations.
Earnings Recovery Gaining Momentum
Q3FY25 earnings have exceeded expectations, marking a turnaround from the previous quarter. NIFTY companies have outperformed analyst estimates by 2%, with overall earnings growing by 4% in Q3FY25. This is a notable improvement from the flat earnings and significant misses seen in Q2FY25.
Analysts remain optimistic about FY26, maintaining a 16% earnings growth projection, significantly higher than the current year.
Sectoral Performance
- Earnings Surprise: Banks, NBFCs, IT, and Capital Goods have outperformed expectations.
- Double-Digit Growth: NBFCs, Capital Goods, and IT sectors are leading the earnings recovery.
- Pharma Performance: The sector has delivered solid results, barring a few U.S. generics exporters.
- Commodities Stabilizing: Steel, cement, and petrochemical companies reported margin declines but are showing signs of bottoming out.
Additionally, government tax cuts are expected to boost consumption, while capital expenditure (capex) growth is set to accelerate to 10-15% in FY26, up from sub-5% in FY25, as execution improves post-elections.
Valuations Offer a Compelling Opportunity
The recent market correction has created a more attractive entry point for investors. India’s stock market is now trading at median valuations, supported by accelerating earnings growth.
Among the top 300 companies:
- 35% of stocks are now trading below 25x PE.
- Only 20% of stocks are trading above 50x PE.
NIFTY’s PE ratio of 20x for FY26 is reasonable given the projected 16% earnings growth in FY26 and FY27.
Trump’s Policies: More Upsides Than Risks for India
While concerns about a trade war under President Trump remain, his policies also present significant benefits for India.
Key Positives from Trump’s Presidency:
- Geopolitical Stability: A decline in conflicts in Israel, the Middle East, and Ukraine will reduce global risk and lower logistics costs.
- Lower Oil Prices: Trump’s push for increased U.S. oil production and stability in the Middle East could lead to cheaper crude, a significant positive for India as a major oil importer.
- Fiscal Deficit Reduction: The Trump administration’s focus on lowering the U.S. fiscal deficit could bring down inflation and interest rates, supporting global capital flows.
Conclusion
With earnings growth rebounding, valuations turning attractive, and external risks being balanced by potential positives, India’s stock market is well-positioned for a strong comeback in the latter half of 2025. Investors should closely watch sectoral trends and macroeconomic developments, as the next phase of the market cycle presents fresh opportunities for wealth creation.