Direct Equities: Markets brace for volatility

Despite the lack of a traditional "Santa Rally" in December 2024 due to the US Fed’s hawkish stance, the medium- to long-term investment case for Indian equities remains positive. Analysts project a 3-year CAGR of 11-12% for Nifty-50/BSE-500, though near-term sentiment will be shaped by FII flows, inflation trends, and sectoral performance.

In the short term, earnings growth expectations for Q3FY25 are improving, but valuations, particularly in mid- and small-cap stocks, remain elevated. Investors are advised to stay selective and focus on large-cap opportunities while monitoring upcoming policy decisions and corporate earnings.

Highlights

• The market is in a consolidation phase with a negative bias, impacted by key events like Trump 2.0 policies, the FY26 Union Budget, and US Fed rate decisions.
• Valuations are still high, with mid-cap and small-cap indices trading at a 31-38% premium to their historical averages, suggesting room for further correction.
• Nifty-50 expected to yield ~10% returns over 12 months, assuming valuation multiples moderate to historical averages.
• Key drivers to watch: Trump’s policy measures, US Fed rate decisions, India’s inflation print, Union Budget, and FII flows.