Market outlook 2025: What key triggers and challenges will shape the Indian stock market next year?

Market outlook 2025: The Indian stock market remains well-poised for a healthy growth in the medium to long term due to strong macroeconomic fundamentals. However, experts believe the durability of growth, revival of corporate earnings, government policies and global factors, including geopolitical tussle, US Fed interest rate trajectory and Donald Trump’s tariff policies will be the key factors that will dictate the market trends in 2025.

Indian stock market benchmark Nifty 50 looks set to end the year 2024 with moderate gains. The index is up 9 per cent this year so far. Last year, the index had clocked a gain of 20 per cent.

Experts believe the coming year could also see moderate gains for the Indian market unless there is a strong rebound in corporate earnings and economic growth.

“Sustained economic growth, strong corporate earnings, and measures the government announces in the upcoming budget and the path to tax orientation will be key triggers for the market. Global factors such as interest rate decisions by major central banks and geopolitical stability will also play crucial roles. Donald Trump’s policies on tariffs and tax will likely alter supply chain dynamics,” said Trilok Agarwal, Fund Manager – Equity, Ambit Asset Management.

“Risk of a global recession and inflationary pressures could also impact market sentiment. The dynamic relationship between the US and China may also lead to volatility. Domestic factors like regulatory uncertainties and potential currency fluctuations on account of the US dollar versus emerging market currency could change the course of foreign Investments in India,” said Agarwal.

Key challenges for the Indian stock market in 2025

The key challenge for the Indian stock market is a slowdown in global growth and rich valuation of the Indian stock market.

Despite recent correction, several pockets of the Indian stock market still remains rich in valuation even though corporate earnings have been slowing for the last few quarters.

“Growth revival across consumption and investment is one of the key triggers for FY2025. Key challenges include a weak global growth environment and expensive valuations across the board,” said Amit Ganatra, Head of Equities, Invesco Mutual Fund.

The growing comfort of domestic investors with equities is another key risk for the Indian stock market.

“While there’s been a narrative around US exceptionalism, India’s long-term growth trajectory remains structurally strong due to better macroeconomic fundamentals (current account deficit, fiscal deficit, inflation). However, domestic investors’ growing comfort with equities as ‘risk-free’ assets, especially in the absence of a down year, poses a risk. It’s crucial for investors to remain vigilant about valuations and not overlook potential risks,” S Naren, ED & CIO, ICICI Prudential AMC, observed.

Moreover, Naren highlighted that over the last few years, we have seen small and mid-cap stocks consistently outperform large-cap stocks despite scepticism about their valuations. The FII-driven selling in large-caps has contributed to this trend, but small and mid-caps remain overvalued and are yet to correct, Naren said.

What should Indian investors do?

Experts advise investors to stay focused on long-term fundamentals and keep a keen eye on valuations and market sentiment. They also recommend diversifying portfolios to manage risks.

“Multi-asset strategies are an excellent way to diversify and manage risk. Hybrid funds, offering exposure to equities, debt, and commodities like gold, provide a balanced approach to asset allocation, making them an appealing option for investors looking to diversify across asset classes,” Naren said.

Some experts see opportunities in the IT, banks, FMCG and infra sectors.

Deepak Ramaraju, Senior Fund Manager at Shriram AMC, is positive about the FMCG sector due to its attractive valuation.

Ramaraju said the IT sector may also do well in 2025 as discretionary spending picks up, provided Donald Trump does not impose surprise tariffs.

Banks may also witness recovery post-interest rate cuts, resulting in a possible pick-up in credit growth, said Ramaraju.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.