Stock Market Outlook: What to Expect for the Rest of 2025

Introduction

Over the past year, the Indian stock market experienced significant volatility but has risen by 7% to 8% since April 2024. The journey was guided by uncertain macroeconomic fundamentals, foreign investment outflows, and a gradual increase in domestic consumption. Major indices such as the Sensex and Nifty 50 have delivered below-par results compared to the compounded annual growth rate (CAGR) of approximately 12.85% between January 2020 and January 2025.

The outlook for the rest of 2025 shows several significant challenges. These include rising tensions with Pakistan, the potential effects of tariffs imposed by the United States, and concerns about the current valuation of the Indian stock market.

The Post-COVID Surge

Since the sharp market crash caused by the COVID-19 pandemic in early 2020, the Indian stock market has experienced a remarkable recovery and strong growth. Key indices such as the Nifty 50 and Sensex have rebounded significantly, rising over 220% from their lows in March 2020.

This initial recovery was driven by global liquidity and hopes of economic recovery. As businesses reopened and economic activities resumed, corporate earnings improved further and boosted investor confidence. Government policies for infrastructure development and manufacturing incentives attracted local and foreign investors. As a result, Foreign Portfolio Investors (FPIs) invested heavily in Indian equities, motivated by the country’s growth potential and robust domestic consumption. The net FPI investment in the Indian stock markets from FY 2020-21 to FY 2023-24 stood at approximately ₹4,42,987.80 crore.

Additionally, the market experienced widespread participation, with not only large-cap stocks but also mid and small-cap stocks yielding substantial returns. The Nifty 500 which reflects a broader segment of the market, demonstrated this strong growth with over 214% rise from the Covid-19 lows.

At times, the journey has been challenging. The stock markets have experienced periods of volatility caused by global factors such as inflation, interest rate increases by central banks, and geopolitical tensions. Despite these challenges, the overall trend has been upward. Currently, Nifty50 has closed near 24335 on 30th April 2025.

Future Opportunities and Risks

The Indian stock markets to encounter strong domestic factors and global challenges in the coming months. Although India’s economic growth story remains compelling, geopolitical tensions and shifting global trade dynamics may lead to considerable volatility.

Key factors that crucially influence future stock market performance

Robust Economic Growth:

India is one of the fastest-growing major economies in the world. According to the IMF’s April 2025 World Economic Outlook, India’s GDP is set to increase by approximately 6.2% in 2025 and 6.3% in 2026. This strong domestic growth, driven by consumption, is likely to provide significant support for corporate earnings and boost investor confidence.

Declining Inflation and Potential Rate Cuts:

Recent data shows a decrease in inflation in India falling below the 4% target. This trend raises the likelihood of potential interest rate cuts by the Reserve Bank of India (RBI) in late 2025 or early 2026. Lower interest rates can reduce borrowing costs, stimulate economic activity, and make equities more appealing compared to debt instruments.

Strong Domestic Institutional Flows and Retail Participation:

Domestic Institutional Investors (DIIs) like mutual funds and insurance companies play a crucial role in the Indian markets. In recent years, the increasing participation of retail investors has provided a strong counterbalance to potential outflows from Foreign Portfolio Investors (FPIs). Over the past year, both DIIs and retail investors have been net buyers, in contrast to FPIs.

Rising India-Pakistan Tensions:

In response to the terror attack on Hindu tourists in Pahalgam, Kashmir, on 22nd April 2025, the Indian government is implementing strong countermeasures amid rising tensions with Pakistan. Any armed conflict could negatively impact the market due to heightened risk aversion and economic disruptions, affecting investor sentiment.

Trump’s Trade Policies:

US President Donald Trump’s new tariffs on China and other trading partners will result in negative implications for Indian economy as well. Increased tariffs could disrupt global supply chains, elevate input costs for Indian manufacturers, and reduce export demand. These factors could ultimately affect corporate profitability and investor confidence.

Global Economic Slowdown:

The uncertainity and tensions are on the rise due to new tariffs imposed by the US on their trading partners. The IMF has revised its global growth forecast for 2025 downwards to 2.8%. This is a 0.5 percentage point decrease from its January 2025 forecast. A slowdown in the global economy could indirectly affect India’s growth.

Volatile FPI Flows:

After four years of strong performance post-COVID-19 lows, Foreign Portfolio Investors (FPIs) are now taking profits from our markets, resulting in a net outflow of about ₹1.22 lakh crore in the last financial year. This outflow is a key factor in the underperformance of the Nifty and Sensex over the past year. Concerns about valuations, a strong US dollar, and global uncertainties might lead to continued volatility in FPI flows, affecting market liquidity and investor sentiment.

Expected Market Behavior for the rest of 2025

Increased Volatility:

The combination of positive domestic conditions and impending global risks points to a period of heightened volatility. Market fluctuations will likely be sensitive to geopolitical developments, news related to US trade policies and global economic data.

Sectoral Outperformance:

Sectors with strong domestic demand, like infrastructure, consumer discretionary, and financials, may perform better. Defensive sectors such as FMCG and pharmaceuticals can provide stability during uncertainty. Export-focused sectors like IT, pharmaceuticals, and manufacturing may face challenges from global trade issues, especially during unlikely events such as economic depressions or wars.

Focus on Fundamentals:

In a volatile environment, investors are likely to emphasize company fundamentals more than usual. This includes factors such as earnings growth, balance sheet strength, and the quality of management. Stocks of high-quality and bluechip companies with a strong track record are more resilient during these times.

Conclusion:

Currently, the Nifty is trading at a price-to-earnings (P/E) multiple of around 22, indicating that the markets are not highly overvalued. In comparison, the Nifty was trading at around 27 PE in 2008 during the Global Financial Crisis, when stock markets worldwide experienced a crash.

Equities are also not undervalued at this time. We are in a complicated global situation where the likelihood of further interest rate hikes is considerably lower. Inflation appears to be largely under control. Therefore, there is no immediate concern for a market crash. Additionally, foreign portfolio investors (FPIs) have been reentering the Indian markets for the past three weeks.

However, ongoing tensions between India and Pakistan following the terrorist attack in Pahalgam, along with uncertainty surrounding renewed tariffs from the US, may keep investors cautious in the coming two to three months.

In light of these factors, a reasonable investor should consider diversifying their portfolio across equities, debt funds, bonds, and gold. In my opinion, allocating 50% to equities and 50% to other less risky investments is the best strategy during these uncertain times.

Disclaimer:

I provide the information and my views on the website only to educate people, new investors, and stock market enthusiasts on equity and other market investments. Please consult a SEBI registered financial advisor before making any investments in the stock or commodity markets. In case of any queries, you can contact me on Contact Form or email: admin@valueinvestingonline.in.