Stock market may take a breather
Following a robust 10 per cent rally in the Nifty since the tariff pause announcement on April 9, 2025, Emkay expects markets to pause. The rally has eroded valuation comfort, and further escalation in the Middle East could prompt a correction. Nonetheless, Emkay remained optimistic about India’s medium-term prospects, citing a likely earnings rebound supported by aggressive RBI rate cuts and softening commodity prices. The brokerage's sectoral preferences remain unchanged — it continues to favor Discretionary, Technology, and Materials while maintaining an underweight view on Financials and Staples.
38% stocks above 5-year valuation multiple
The brokerage noted that the recent rally has driven the Nifty’s 1-year forward P/E to 20.9x, just below its long-term average. However, broader markets are showing signs of froth, with 38 per cent of BSE200 stocks now trading above their 5-year average valuations, compared to just 12 per cent on April 9.
Despite the valuation premiums, Emkay argues that Small and Midcaps (SMIDs) remain attractive due to their superior earnings growth, better composition, and improving balance sheets. It sees more potential in SMIDs over the next 1–2 years, particularly as large caps remain weighed down by Financials and Staples.
Fund dlows resilient despite global headwinds
Domestic mutual fund flows continued to strengthen through May, following the market rebound in April and a temporary easing of global risk sentiment. Foreign portfolio investor (FPI) outflows have moderated since March and turned positive in May. However, Emkay cautions that renewed geopolitical tensions could trigger another round of FPI selling, though it remains optimistic about medium-term flows.
"As the US economy decelerates, emerging markets — particularly India — are likely to benefit from increased capital flows, especially given the cyclical recovery expected in H2 FY26," the firm noted. It added that while current valuations present near-term risks, there are no signs of supply-side stress. IPO and QIP activity remains subdued (₹110 billion in the last month), but block deals have seen a notable uptick (₹40 billion). Promoter selling and pledging activity remain within comfortable levels, Emkay added.
Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
