What can trigger the next market rally in India? Morgan Stanley explains

The next leg of the market rally will be driven by how the April – June quarter (Q1-FY27) corporate earnings season and the monsoons plays out, said analysts at Morgan Stanley in a recent coauthored note led by Ridham Desai, their managing director and chief India equity strategist. 

 

As a strategy, Morgan Stanley favours domestic cyclicals over defensives and externa- facing sectors; their overweight sectors include financials, consumer discretionary and industrials. It remains underweight on energy, materials, utilities and healthcare. 

 

“IT Services may prove the dark horse as the world turns to these firms to build artificial intelligence (AI) applications and solutions,” Morgan Stanley said.

 

 

The principal catalyst for the market to move up from here, according to Desai, is how it gauges the growth gap between India and the world. That view, it said, may shift if global sentiment turns cautious on AI capex and/or India’s growth accelerates.  

 

“The coming quarterly earnings season should therefore offer useful signals, and we expect an upside surprise given strong high frequency indicators. Investors may also watch the monsoon, though we do not share that worry,” wrote Desai in a coauthored note with Nayant Parekh.

 

As a base-case scenario, they have maintained June 2027 Sensex target at 89,000 levels, up nearly 14 per cent from the current levels. Morgan Stanley attached 50 per cent probability to this forecast. 

Morgan Stanley index target

 

In their bull-case and bear-case, Morgan Stanley sees the Sensex at 100,000 and 66,000 levels, respectively by June 2027, and attach a 25 per cent probability to each of these forecasts.

 

“A rising wave of initial public offers (IPOs) could lend further support until it turns excessive – a point we see as several months off,” Morgan Stanley said.

 

AI & near-term risks

 

AI, meanwhile, Morgan Stanley said, poses a near-term risk to India’s services-export momentum but, over the medium-term, offers a substantial chance to lift labour productivity from a low base. 

 

Longer-term growth, the research house said, is further underpinned by a multi-polar world that can expand India’s share of global goods trade, a widening consumer base and a marked pickup in investment.  

 

“We, therefore, read the de-rating as cyclical – the product of a sharp gap in relative growth; India’s growth looks to have bottomed and is now trending higher, yet still trails that seen elsewhere, particularly in economies tied to the AI capex cycle,” Desai and Parekh said.

 

India vs peers

 

Meanwhile, India's cumulative outperformance compared to the MSCI EM Index of +10 per cent (between June 2021 and September 2024 peak) has swung to an underperformance of -40 per cent (between the September 2024 peak and June 2026), said analysts at Motilal Oswal Financial Services (MOFSL).

 

Simultaneously, India's valuation premium over emerging markets (EM) has compressed to a historic low of 18 per cent in June 2026, significantly below its long-term average of 73 per cent and CY22 peak of 147per cent.

 

A key factor for India's underperformance in recent times, MOFSL said, has been the sharp global capital rotation toward a narrow group of AI-driven Big Tech companies and related technology beneficiaries, which has left non-AI markets, such as India, bearing the brunt of this shift.

 

“India's prolonged period of relative underperformance has led to more attractive valuations and positioning. Any broadening of global market leadership or rotation away from AI-centric trades toward a wider range of sectors and markets is likely to serve as a meaningful tailwind for Indian equities,” MOFSL said in a recent note.