US-Iran war hit markets; Morgan Stanley sees Sensex at 107k: Here's why

Global brokerage Morgan Stanley believes that the recent weakness in Indian equities reflects market plumbing issues rather than structural problems, even as escalating Middle East tensions continue to weigh on sentiment and trigger a sharp correction. The report comes at a time when domestic benchmarks have fallen for a third straight session amid rising US-Iran tensions and fears of oil supply disruptions.  Equity strategists Ridham Desai and Nayant Parekh said Indian stocks are currently reacting more strongly to negative news than to positive developments, raising concerns among some investors about possible structural issues in the market. However, the brokerage disagrees with that view and sees the correction as an opportunity to buy high-quality businesses at reasonable valuations, despite the potential for near-term volatility.  

 

Geopolitical tensions in the Middle East have emerged as a fresh challenge for markets. While India’s oil intensity has reduced over time, the country still relies on imported crude and uncertainty around oil logistics and potential production disruptions could hurt sentiment, the brokerage said.  

At the same time, Morgan Stanley flagged other factors weighing on market behaviour. The absence of a clear artificial intelligence (AI) theme in Indian equities and concerns that AI could disrupt services exports have added to investor caution. Passive funds may also continue selling to adjust to India’s falling index weight, while some hedge funds are using India as a funding short, the report noted.

Earnings growth turning

Despite the volatility, analysts said the market has already digested significant positive developments. 

"Earnings growth is already turning after a six-quarter mid-cycle slowdown and is likely to accelerate further into 2026, driven by reflationary policies of the RBI and the government via rate cuts, bank deregulation and liquidity infusion, continuing capex, tax cuts and relatively stimulating budget," they said. 

Additionally, India’s macro policy stance, which remained relatively hawkish after the pandemic, has now begun to unwind. Further positives include trade deals, improving relations with China, an undervalued currency and strong domestic flows into equities. 

According to Morgan Stanley, India’s trailing 12-month performance has been among the weakest historically, even as valuations approach previous troughs. Foreign portfolio investor positioning has also weakened in recent months, which is another factor behind subdued sentiment.

Sensex target unchanged

Despite the uncertainty created by the Middle East conflict, Morgan Stanley has retained its Sensex target of 95,000 by December 2026, implying an upside potential of around 18 per cent. It expects Sensex earnings to compound at about 17 per cent annually through FY28 in its base case scenario, supported by stronger domestic growth and improving macro stability.   

In its bull case, the index could reach 107,000, assuming oil prices remain low and global growth improves. In a bear scenario, where crude rises sharply, and global growth slows, the Sensex could fall to 76,000, the brokerage said. 

From a portfolio perspective, the brokerage prefers domestic cyclicals over defensives and external-facing sectors. It remains overweight on financials, consumer discretionary and industrials, while underweight on energy, materials, utilities and healthcare. The strategy is capitalisation-agnostic, focusing instead on quality and earnings visibility.  Disclaimer: The views or investment tips expressed by the brokerage in this article are their own and not those of the website or its management. Business Standard advises users to check with certified experts before taking any investment decisions.