Global financial services firm Morgan Stanley has delivered an optimistic forecast for the Indian stock market, predicting a significant recovery by 2026 following its worst relative performance against emerging markets in over three decades. The analysis comes as a breath of fresh air for investors concerned about recent market underperformance.
Ambitious Targets for Sensex
In their latest India strategy report, Morgan Stanley equity strategists Ridham Desai and Nayant Parekh have set a base-case Sensex target of 95,000 by December 2026, assigning this scenario a 50% probability. More remarkably, they've outlined a bull-case target of 107,000 for the same timeframe, with a 30% probability of occurrence.
The analysts argue that policy changes and reflation efforts are establishing the foundation for robust recovery in nominal growth and corporate earnings. This comes after what they describe as a mid-cycle slowdown experienced over the past year.
Factors Driving the Optimistic Outlook
Several key developments are contributing to Morgan Stanley's positive assessment. The brokerage notes that relative valuations have undergone significant correction and likely reached their lowest point in October. Meanwhile, foreign portfolio investor exposure to Indian markets remains at historically light levels, suggesting substantial room for increased investment.
The structural domestic demand for equities continues to remain strong, supported by growing household allocation to stocks. Morgan Stanley believes India is positioned for a positive growth surprise, driven by combined efforts from the RBI and government.
Key policy measures expected to fuel growth include:
- Interest rate cuts and CRR reduction
- Bank deregulation and liquidity infusion
- Front-loaded capital expenditure
- Approximately ₹1.5 lakh crore in GST rate cuts focused on mass consumption
International developments also play a crucial role in this optimistic scenario. The thawing of relations with China combined with China's anti-involution drive, along with a potential India-US trade deal, are expected to significantly boost market sentiment.
Earnings Cycle and Portfolio Strategy
Morgan Stanley believes the earnings cycle is only at its midpoint and identifies five key drivers for continued growth:
The emerging private capex cycle, corporate releveraging, a robust banking system, improving terms of trade through higher participation in global commerce and reduced oil dependence, and a structural rise in discretionary consumption.
Regarding investment strategy, the firm prefers domestic cyclicals over defensive and external-facing sectors. They maintain overweight positions on Financials, Consumer Discretionary, and Industrials, while keeping underweight stances on Energy, Materials, Utilities, and Healthcare.
The analysts note that the market is transitioning toward being driven more by macroeconomic factors, where individual stock selection becomes less critical. They emphasize being capitalization-agnostic in their approach.
Risk Scenarios and Projections
Morgan Stanley has also outlined alternative scenarios. In their bear case, which carries a 20% probability, the Sensex could reach 76,000 by December 2026. This scenario assumes oil prices exceeding $100 per barrel, RBI tightening to maintain macroeconomic stability, a significant global slowdown including US recession, worsening India-US trade relations, and de-rating of equity multiples.
Under the base case, Sensex earnings are projected to compound at 17% annually through FY28, while the bull case anticipates 19% annual earnings growth over FY25-28. The bear scenario projects 15% annual earnings growth with weaker performance in FY26.
This comprehensive analysis from one of the world's leading financial institutions provides Indian investors with a roadmap for potential market recovery and growth over the coming years, highlighting both opportunities and risks in the evolving economic landscape.
