Sensex, Nifty set to reverse their worst performance in 31 years, here's why

The Indian stock market is expected to see a strong bounce in the next 12 months, according to Morgan Stanley. The brokerage has a base case target of 95,000 for BSE Sensex, which implies upside potential of 13% through December 2026. This level indicates that Sensex would command a trailing P/E multiple of 23.5x, ahead of the 25-year average of 22x. The premium over the historical average reflects greater confidence in the medium-term growth cycle in India, India's lower beta, a higher terminal growth rate, and a predictable policy environment.

The brokerage believes that the policy has pivoted, supporting a strong recovery in nominal growth, which should take earnings growth out of the mid-cycle slowdown experienced over the past 12 months. 

"Relative valuations are consistent with improved forward performance. FPI exposure remains the lightest in history. The structural domestic bid is intact. India's long-term story has been reinforced with a slew of reforms, Thus, in our view, Indian equities appear set to reverse their worst performance relative to emerging markets in 31 calendar years," says the brokerage. 

In the scenario of bull case which the brokerage says has a 30% probability, Sensex is likely to reach 107,000 next year. 

Citing the factors behind its assumption, the brokerage says oil prices are persistently below US$65/bbl, resulting in better terms of trade. Reflation policies are expected to achieve success and result in higher growth estimates. The index can also reach new highs of 1,07,000 when global trade war is curtailed by reversals in positions on tariffs, leading to improved growth prospects. Earnings growth compounding at 19% annually over F2025-28 can also bring back bulls on Dalal Street, the brokerage believes. 

In a bear case scenario for which the probability is 20% Sensex is likely to fall to 76,000 level, says Morgan Stanley. The crash in the index would be backed by oil prices rising past US$100/barrel, the RBI ending tightening to protect macro stability, a meaningful slowdown in global growth, and notably, the US slipping into recession. 

Other factors which could pull the 30 stock index lower are trade conditions between India and the US deteriorate further, Sensex earnings compound at 15% annually over F2025-28 with perceptibly lower growth in F2026 and equity multiples de-rate to reflect poor macro conditions.

Risk 

The brokerage sees a slowdown in global growth from its current forecasts as the biggest risk for its bullish assumptions. 

"India could easily outperform a global selloff given its low beta, but such a selloff would likely impede absolute upside in Indian stocks. While market participants appear to worry about the expanding issuance pipeline, a threat to domestic flows in view of poor trailing equity returns, elevated absolute valuations, growth uncertainty. and India's weak position in the AI trade, we argue that these concerns are misplaced," said Morgan Stanley.