Market Outlook: Indian equities could be on the verge of regaining momentum after months of underperformance, as several factors that have weighed on the market since September 2024 are beginning to reverse, according to a strategy report by ICICI Securities.
The brokerage believes that a combination of improving macroeconomic conditions, more reasonable valuations, easing foreign investor selling and softer has created a more supportive backdrop for equities. While risks remain, the report suggests the balance of factors is turning increasingly favourable for the domestic market.
Indian equities have faced a challenging period over the past several months. High valuations, slowing nominal GDP and earnings growth, persistent foreign portfolio investor () outflows, enthusiasm surrounding global AI infrastructure stocks and external shocks such as US tariffs and geopolitical tensions in West Asia had all contributed to market weakness.
So far this calendar year, benchmark indices have corrected nearly 9%, while overseas investors have pulled out a net ₹2.73 trillion from Indian equities as of June 24.
According to the brokerage, valuations have become significantly more attractive after the correction.
“, from the peak of around 24x, have scaled back to around 18x; in parallel, the outlook for nominal profit growth is showing vigour, with inflation rising from the troughs alongside resilient corporate volumes and an improving capex cycle,” the report said.
ICICI Securities believes the current valuation levels improve the probability of stock prices tracking earnings growth even without further expansion in valuation multiples.
It added that the lower end of the valuation range currently provides a high-probability scenario of stock prices tracking accelerating nominal growth of 14-15%, even without valuation re-ratings.
AI enthusiasm cools, but broader market risks remain limited
The brokerage also highlighted that the rally in AI infrastructure-related stocks globally has started to lose momentum after an extended period of optimism.
“The AI infrastructure stock euphoria has started to show signs of fatigue, with volatility in stock prices rising across Nasdaq Big Techs to Korean AI stories. It is coinciding with post-IPO price reversal (SpaceX), concerns on misallocation of capital, debt raising and fear of rising competition,” the report said.
Despite signs of fatigue in AI-related stocks, ICICI Securities does not expect a broader market collapse.
“Relatively strong balance sheets of hyperscalers and optimism as regards to robust demand offer a buffer against a collapse that could be a systemic risk for global equities,” the report noted.
Macro indicators strengthen investment case
Beyond valuations, the brokerage sees improving economic indicators adding support to the market outlook.
India’s expanded 7.8% in the fourth quarter of FY26, driven primarily by gross fixed capital formation. The report also noted that the Reserve Bank of India’s recent policy measures could help attract greater foreign investment into debt markets.
Other macro indicators have also improved. India’s current account moved into surplus, supported by robust services exports and remittance inflows. Meanwhile, crude oil prices have slipped below $80 per barrel, the rupee has strengthened to below 95 against the US dollar, and the benchmark 10-year government bond yield has eased below 6.9%.
The brokerage said softer crude prices are particularly positive for domestic equities because of the historically inverse relationship between elevated oil prices and the . Lower crude prices can also reduce India’s import bill and ease pressure on the country’s external account.
At the same time, FPI selling, which was largely concentrated in select positions, has begun to moderate as geopolitical tensions have eased.
However, ICICI Securities cautioned that some risks continue to warrant close monitoring. Among the key concerns are the possibility of an El Nino weather event in 2026 and the risk of additional US Federal Reserve rate hikes later this year, both of which could influence capital flows and market sentiment.
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