Long live the mad bull market: A strong comeback seems unlikely soon

From their peaks between late September and early December, various market indices have fallen sharply. The Nifty 50 index is down 13 per cent, the Nifty 500 and Nifty Midcap 16 per cent, while the Nifty Small cap and Microcap about 20 per cent. It is the fall in the last two indices that is causing a lot of distress. Over the past three years the character of the Indian market has changed dramatically.  The Nifty 50 or even the Nifty 500 does not represent the market that we have just experienced. Since 2021, smallcap and midcap stocks have skyrocketed and form the core of the market today as retail investors and many mutual funds piled in. These days, most initial public offerings are from microcap companies, not even smallcap! Smallcaps and midcaps have shot up so much that even the smallest midcap now commands a valuation of ₹28,000 crore. The largest are close to ₹1,00,000 crore. Smallcaps make a long list but many have a ₹10,000 crore and higher market cap. Together they form the core of the market and the outlook for this segment is not great.

  The leading indices actually hide the bloodbath in most of the high-flying stocks of this segment, which have fallen by 30-40 per cent or more. The fall has been indiscriminate, irrespective of whether their latest results have been good or not. The market mood is something like this: If the results are bad, sell; if the results are good, sell because valuation is too high. This syndrome has affected dozens of sectors and sub-sectors. Where do we go from here? If it was a “correction” is it over, and will the bull market resume its journey? Well, I am not sure if this was a correction and if it is over, but one thing is certain. A bull market of the kind we witnessed in the past few years is not about to return anytime soon. That bull market is dead for now.

  Anatomy of a bull 

Bull markets rise on the basis of multiple medium-term triggers, some local, some global. The 2021-24 bull market had multiple triggers: A strong global and local economic rebound from the Covid-induced recession in 2021, followed by huge capital expenditure (capex) by the government across multiple sectors — railways, defence, transportation, renewable energy, civil works, water, sanitation, etc. This sparked a stock-market boom, attracting millions of new investors and social-media influencers, pushing up stock prices (especially smallcaps) and creating a self-reinforcing cycle. But now the post-Covid economic recovery is pretty much over and growth is slowing. As a result, government income is taking a hit, leaving less room for capex. The Budget still has a massive allocation of ₹11 trillion, but project sanctions are slowing. For the first five months of 2024-25, the excuse for slow sanctions was elections and the model code of conduct, but that excuse is starting to wear thin. In short, the boom is over, and the self-correcting normalisation cycle is kicking in. 

To add to this, American President Donald Trump has re-occupied the White House and has lost no time in hurling a cocktail of confusion, challenges, and craziness that is hard to understand and whose impact it is harder to calculate. So far, every decision of the Trump administration has been bad for India. The latest is demanding and getting duty cuts for importing Tesla cars. The government wants Tesla to set up a local factory as part of the deal, but Mr Trump thinks it is unfair. Fortunately for us, even with 0 per cent duty many US products are uncompetitive or will attract insignificant sales. But meanwhile, India’s policymaking on trade and industry will be subject to brutal and tempestuous Trump policies. India is particularly vulnerable because we have no leverage. In short, the Indian economy and markets now face multiple headwinds and Indian policymakers have no capacity to deal with them. Companies will bear the brunt of this storm; those with high valuations will crash. 

This does not mean that there will not be sharp rallies; stocks don’t head lower in a straight line. But it is hard to see such rallies sustaining over time. There are simply no bullish triggers. India’s growth is likely to hover at 5-6 per cent as in the past, for reasons I have explained in several previous columns. Economic policies remain more or less the same, the economic climate militates against enterprise, and consumption remains low among the masses (because of poor income growth and high inflation) and high among the rich in a K-shaped economy. This is not a recipe for innovation and productivity-led growth, which alone can lead to sustained wealth creation. High government capex in the last two years was an exception and could be the only bright spot if it continues. As against this, India will be under intense pressure during the four years of Mr Trump, to buy arms and oil, cut tariffs, and open up markets. India has no answers to savage, one-track, self-serving US policies unleashed under the new regime. To top it all, it is not even clear whether Mr Trump can Make America Great Again. US economic growth may slow in the second half of 2025 if tit-for-tat tariffs, tighter immigration, and cutting government “waste and inefficiency”, led by Elon Musk, actually start hurting the economy. If so, those will hurt India too because the US is India’s largest export market. India has a weak capacity to withstand these negative trends that are coming together at the same time. 

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The writer is editor of www.moneylife.in and a  trustee of the Moneylife Foundation; @Moneylifers