A focus on earnings growth and moderation in valuations will be critical for sustaining long-term market performance in 2025

The absence of new year cheer was evident as Dalal Street continued crashing in the last week of December leading to 2025, in the process eroding investors’ wealth to the tune of Rs 9.65 trillion as Sensex tanked by 2,915 points. The bear run at a time when the market was already grappling with thin year-end volumes was made worse by a weakening rupee as it slid towards the 86-per-dollar mark. This further dampened the appeal of Indian equities for foreign institutional investors (FIIs) leading to robust FII outflows.

The prevalence of this phenomenon was worldwide with Japan’s Nikkei 225, China’s Shanghai Composite, Australia’s ASX 200, Germany’s DAX, France’s CAC 40 and NASDAQ Composite showing similar bearish sentiments. The current stock market meltdown is influenced by several factors.

Not only in India, but global markets are witnessing this trend particularly due to profit-taking, and tax-loss harvesting focussing on year-end tax strategies, giving a miss to the traditional ‘Santa Claus rally’. Institutional and retail investors alike booked profits and rebalanced their portfolios, particularly in large-cap stocks which posted strong growth in 2024, leading to selling pressure across the board and a broad-based correction.

As economic interlinkages of India with the world have deepened, so has the integration with global stock markets. The uncertain global economic conditions, particularly in countries like the United States, coupled with fears of a global recession fuelled by weak manufacturing data from China, have dampened investor sentiment both worldwide and in India.

A decline in the demand for Indian exports, mainly in the IT and manufacturing sectors further led to the market’s downward spiral. Geopolitical tensions including regional wars,  ambiguous crude oil prices and subsequent disruptions in supply chains have impacted the markets and sector-specific tragedies like the Jeju Air crash in South Korea contributed to the overall bearish sentiment.

Weaker than expected third quarterly results, particularly in the banking and consumer goods sector, dampened the confidence displayed by the markets due to the resilient first two quarters showed by the Indian economy. This reduced the conviction further as the banking and consumer goods sectors were considered growth engines since the beginning of the year.

Stock market valuations in India and around the globe were elevated in 2024.

In India, the higher valuations were fuelled by strong domestic economic growth and robust corporate earnings, leading to sustained investor confidence.

Several companies ranging across industries were trading at premium P/E ratios, like Infosys (28-30x); HUL (55x); Bajaj Finance (40x); and Zomato (10-12x) to name a few. However, since the question of sustaining the overvalued stocks in the backdrop of weak quarterly earnings is difficult, it led to the year-end market corrections that we are experiencing at the end of December 2024.

Although the aggressive monetary policy by the Reserve Bank of India was able to combat inflation during the year, high interest rates negatively affected the borrowing costs of businesses and retail investors.

This led to increased interest in investments in fixed-income securities instead of finding equity markets attractive. Foreign Institutional Investors (FIIs) who were attracted to the Indian growth story and wanted to be its integral part also turned into net sellers in December 2024. A risk-averse stance and a strong USD value made emerging nations like India less attractive during the year-end, leading to capital outflows, which in turn led to a weakening rupee again. Overall, the bearish stock market sentiment in December 2024 was a combination of year-end profit-taking strategies, global economic outlook, high stock valuation concerns, weak sectoral performance and outlook and several international events. However, all is not bleak. These fluctuations are a part of the larger economic cycle and the markets will see an upward cycle with a long-term focus on the fundamentals and relevant steps at the policy level. The resilient Indian economy and its economic growth will be the key driver for renewed opportunities for growth and investment in 2025.

This economic growth will be supported by increased investments in infrastructure, boosting the manufacturing environment to improve the industrial output, a burgeoning middle class and a revival of the rural economy may increase the demand for automobiles, FMCG and consumer durables in 2025. In addition, India’s rapidly growing digital economy will continue to support new-age companies and sectors.

(The writer is Associate Professor at Amity University, Noida. The views expressed are personal)