Outlook: Where to invest in an ageing bull market? Nuvama Equities decodes

Stock market outlook: As the pent-up demand-led stock market rally faces downside risks, analysts at Nuvama Institutional Equities share their investment guide for an ageing bull market

Stock market outlook: The bull run in India's stock market, which began after the Covid-19-induced market crash, is ageing. In fact, rising headwinds, including high valuations and plateauing profit growth, are leaving little room for upside for Indian equities.

 

According to analysts at Nuvama Institutional Equities, every bull or bear market, typically, expires in about five years. The post-pandemic rebound completed five years in March 2025, thus, officially crossing the five-year mark.

 

The Indian stock market, however, lacks levers to extend this uptrend, they caution.

 

Outlook: Rising risks for Indian stock markets

A recent report by the brokerage noted that India Inc's profits, after outpacing top line post-Covid, reconciled with it in financial year 2024-25 (FY25). It was below 10 per cent in the March quarter of FY25 (Q4FY25), clocking single digit growth for eight quarters on a trot.

 

Going ahead, the brokerage anticipates weakness to persist in FY26 as the economy lacks money multipliers.

 

"The Indian economy has liquidity, but not money. The latter requires a multiplying agent, which is currently absent due to exports being plagued by trade wars, geopolitical conflicts, and China dumping; Corporates increasing their already high free cash flows by curbing capex and wages; Government being debt averse; and Households having weak income, curtailing demand efficacy," it said.

 

At a global level, India's profit growth has reconciled with emerging economies (EMs), after being disconnected for most of Covid.

 

"With post-Covid divergences ending, consensus earnings estimates could see sustained cuts ahead," it said.

 

Add to it, analysts at Nuvama Institutional Equities opine that the valuations of Indian markets are 'expensive'.

 

According to the brokerage, the Nifty500 index’s price to book (P/B) multiple (3.9x) and market cap to GDP ratio (132 per cent) are more than 1-standard deviation (1SD) expensive than the long-term average. This implies lower returns for the markets over the next five years. 

 

Moreover, comparison between earnings growth and current valuations showed that the earnings downgrades over the last one year resulted in a sharp moderation in the one-year forward earnings growth for both the Nifty and SMIDs.

 

"However, valuations are still holding up at very high levels, which is unsustainable," they said.

 

Lastly, India's equity valuations, relative to other EMs, is also trading at a premium of more than 1SD; although earnings differential has narrowed.

 

"In September, 2024, when valuation premiums were high, the earnings differential was high too. Hence, if global uncertainties increase, foreign institutional investors’ (FII) outflows could occur again from India, weighing on markets," Nuvama cautioned.

 

The brokerage added: Despite improved liquidity, the wedge between growth and valuations has substantially increased, capping upside. 

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Indian markets: Where to invest?

According to Nuvama analysts, the pent-up demand, post Covid-19, has normalised. This, coupled with limited room for government spending amid fiscal consolidation, and front-loading of rate cuts by the Reserve Bank of India, leaves no triggers for demand-led earnings growth.

 

"Today, pent up demand is complete and the outlook is uncertain for all segments. Policy priorities are fiscal consolidation, not much boost to any particular segment and valuations are universally rich. This makes spotting a demand theme difficult going ahead. One would need to rely on a bottom-up/micro framework for ideas," it said.

 

Against this, the brokerage believes sectoral leadership will be hard to spot here on. Margin mean reversion, it said, shall drive alpha.

 

Factoring in earnings growth, scope of margin expansion, and demand outlook, the brokerage is 'Overweight' on FMCG, Cement, Chemicals, Pharma, Telecom, 'Neutral' on metals, and 'Underweight' on Real Estate, Power, and IT. 

 

"Private banks are the key winners of FY25. Despite the outperformance, valuations are still reasonable in the space, although for it to remain in centre stage, credit growth needs to bottom out. It continues to be slow, which at some stage could start weighing on its returns," it said.