Indian stock markets have been bleeding for over a year now, with global economic volatility, Donald Trump administration’s tariffs, and now the US-Iran war weighing on investor sentiment. In such a scenario, investors have only one question – where is Sensex headed this year?Morgan Stanley believes the Sensex has the potential to reach 95,000 by December 2026, with its strategist Ridham Desai indicating that Indian equities may be entering a fresh bull phase after enduring one of their weakest periods of relative performance in decades.In its base scenario, the brokerage has set a target of 95,000 for the index, suggesting an upside of roughly 22% from the April 8 closing level of 77,563. This projection values the market at 23.5 times trailing earnings, slightly above its long-term average multiple of 22 times over the past 25 years. “The market appears set up for a big move,” the Morgan Stanley report states, pointing out that returns over the past 12 months have been among the weakest on record, while valuations have retreated to earlier lows.
According to the strategists, the relatively higher valuation multiple reflects stronger confidence in India’s medium-term growth trajectory, supported by lower market volatility, a higher long-term growth outlook, and a stable policy framework.The report also notes that a combination of macroeconomic trends, earnings momentum and capital flows is beginning to favour Indian equities, even as global investors remain cautious. “Trailing performance, valuations, positioning and earnings all support a major recovery in Indian stocks over the coming months,” it adds. It further highlights that the Sensex appears “nearly the cheapest ever in gold terms,” even as India’s contribution to global corporate profits has outpaced its representation in benchmark indices by a record margin.
Under its base case, which carries a 50% probability, the projected rise to 95,000 is contingent on India maintaining macroeconomic stability through fiscal discipline, increased private investment, and a sustained gap where real growth exceeds real interest rates.This outlook also assumes strong domestic expansion, steady global growth conditions and relatively stable oil prices. Additionally, it factors in a supportive liquidity environment, where retail investor inflows continue to match the supply of equities, and corporate earnings for the Sensex grow at an annual rate of 17% through FY28.In its optimistic scenario, which carries a 30% likelihood, Morgan Stanley sees the Sensex advancing to 107,000 by December 2026. This projection is based on assumptions such as crude oil prices easing below $70 per barrel, improved terms of trade, and effective reflationary measures that boost both growth expectations and corporate earnings.
Under this scenario, earnings for Sensex companies are expected to expand at an annual rate of 19% between FY25 and FY28. On the other hand, the brokerage assigns a 20% probability to a downside case, where the index could decline to 76,000. This would materialise if oil prices average above $100 per barrel, prompting the RBI to tighten monetary policy to preserve macro stability, while a recession in the US weakens global growth and leads to valuation compression.Desai also highlights several immediate challenges, including supply disruptions in gas and fertilisers stemming from the Middle East conflict, increasing defence expenditure, and the ongoing concern around India’s absence of a clear, direct play in artificial intelligence.“The lack of direct AI play seems to be the most persistent challenge with potential AI disruption for Indian services exports aggravating matters,” the report cautions, while also noting that any evidence of AI-driven productivity gains could act as a significant upside trigger.
Among potential positives, Morgan Stanley points to sustained strength in growth indicators that could lead to upward revisions in earnings, continued policy reforms offering structural advantages in sectors such as electricity, a possible correction in the overcrowded global AI trade, and a rise in share buybacks that could provide additional support to equities.The strategists also observe improving sentiment around the rupee following recent actions by the RBI, describing the currency as still undervalued. They add that India’s strong external balance sheet and reduced volatility in inflation contribute to a more stable and resilient macroeconomic environment.On valuations and investor positioning, the report highlights that exposure from foreign portfolio investors has steadily declined in recent months. At the same time, the gap between India’s real policy rates and those in the US, along with a relatively flatter yield curve, has historically been associated with stronger future market returns. The composite sentiment gauge has also moved back towards levels that have typically signalled buying opportunities during past market lows. Additionally, India’s representation in global indices remains lower than its share in global profits, suggesting scope for a re-rating as capital flows stabilise.
From a sectoral standpoint, Morgan Stanley continues to favour domestic cyclical segments over defensive and export-oriented sectors. The firm maintains an overweight stance on financials, consumer discretionary and industrials, while remaining underweight on energy, materials, utilities and healthcare. Technology and consumer staples are assigned a neutral position. “We are capitalization-agnostic,” the report notes, while adding that strong government spending, a revival in private capital expenditure and an anticipated recovery in urban demand are likely to benefit banks, industrial companies, automobile firms and select consumer-focused businesses.(Disclaimer: Recommendations and views on the stock market, other asset classes or personal finance management tips given by experts are their own. These opinions do not represent the views of The Times of India)
