Dip, rebound: A Teflon resilience in markets that won't let declines stick

Investors who bought the dip since 2022 have reaped bigger returns from sharper rebounds

After entering ‘correction territory’ — a drop of 10 per cent from recent highs — the domestic markets have rebounded sharply, despite ongoing concerns about slowing earnings, economic growth, and high valuations. Since their recent lows on November 21, the benchmark National Stock Exchange Nifty 50 Index has risen by 6.1 per cent, the broader Nifty Midcap 100 has climbed 8.5 per cent, and the Nifty Smallcap 100 has surged 10.3 per cent.

 

Despite predictions of prolonged weakness from several experts, the smallcap index has reached new highs. This is not the first time a steep decline has been followed by a strong rebound, rewarding risk-taking investors who bought the dip.

 

Since 2022, this marks the sixth instance in which the Nifty 50, Nifty Midcap 100, or Nifty Smallcap 100 indices have dropped 5 per cent or more from their recent peaks, according to an analysis by Business Standard. With only one exception, the markets have seen a sharp recovery within three months following each decline.

 

Experts believe this trend is reinforcing the buy-the-dip strategy and the belief that markets will recover regardless of circumstances. As a result, it is encouraging investors to take riskier bets, often overlooking caution about potential earnings disappointments or high valuations.

 

“In recent years, hundreds of thousands of investors have entered the market each week. The investor base has expanded, and the number of dematerialised accounts has crossed 180 million, as markets have been on a consistent bull run after the pandemic. Every time a new investor joins, the market is either at a new peak or near it, so when there is a correction, they see it as an opportunity to buy. Systematic investment plans are strong, and domestic institutions can’t hold cash for long. A lot of buying comes from them, too. Unless there is a massive drop due to an exogenous factor, this trend is likely to continue,” said Chokkalingam G, founder of Equinomics Research. 

 

While the buy-the-dip strategy has worked in the past, experts caution that it could falter if earnings or economic fundamentals do not support the rebound.

 

“The macro numbers are soft this time, and we’ve seen a slowdown in earnings growth momentum in the first half of 2024-25. The second quarter was weak, and the next quarter might not be great either. Unless there’s a major positive surprise, I don’t see the market recovery holding. If third-quarter results disappoint, it could dampen sentiment for an extended period and lead to a greater decline,” warned Ambareesh Baliga, an independent equity analyst.

 

The latest market rebound has occurred despite most analysts forecasting modest returns for domestic equities in 2025. Brokerages such as UBS and Nomura have cautioned about a potential derating of domestic markets amid a slowing macro and earnings cycle.

 

Last week, Kotak Securities set a modest Nifty target of 26,100 for December 2025, suggesting a 5.4 per cent upside from current levels. Kotak Securities noted that while India’s macroeconomic position remains solid, recent quarterly results revealed a slowdown in rural demand, which contrasted with the June recovery, along with an unexpected drop in urban demand.

 

Each market cycle brings its own mix of winners and losers, making the buy-the-dip strategy more complex than it may seem. In the latest rebound, stocks in the realty, consumer durables, and information technology (IT) sectors have led the gains, while fast-moving consumer goods, pharmaceutical, and energy stocks have underperformed. IT stocks, which have sizeable weight in the benchmark indices, have driven the recent gains for both the Nifty and Sensex.

 

Investors have been enthusiastic about IT shares due to expectations that a potential corporate tax cut by US President-elect Donald Trump will boost IT spending by US corporations. Further, the rising strength of the US dollar has benefited software exporters, who earn the bulk of their revenues in US dollars.