Indian Stock Market Outlook Remains Constructive Amid US-Iran Tensions, Potentially Delivering 15-20% Returns

US-Iran Conflict Escalation Raises Concerns for US Economy and Stock Market

As the US midterm election approaches in November, the escalating conflict with Iran poses a significant risk to the US economy. A prolonged escalation could lead to weaker consumer sentiment and adverse voter perception, thereby heightening economic risks. However, US President Donald Trump appears intent on bringing the conflict to a close, with a 2-3 week timeframe to end the war.

The objectives of the conflict remain unclear, with multiple parties operating under divergent objectives. Israel appears inclined to continue the conflict across Iran and Lebanon, a stance reportedly supported by several Gulf nations. In contrast, Iran is seeking assurances against future strikes and compensation for losses. This dynamic may translate into heightened volatility through April, even as it keeps the prospect of de-escalation alive.

The conflict's impact on the stock market is also a concern. The short-lived conflict has raised the risk of spillover effects on FY27 earnings forecasts. The domestic market's decline in March was a deliberate correction, down 11.3% MoM and 15.3% from the Nifty 50's 52-week high. The key consideration is duration: the longer the conflict persists, the greater the potential economic and earnings damage.

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Given the extent of damage to regional oil infrastructure and the risk that near-term rhetoric continues to support hostilities, crude prices are likely to remain elevated in FY27 relative to the FY26 average of $69/bbl. This environment could pressure the earnings outlook, with an initial estimate of a 2-6% drag, depending on the trajectory of crude and macroeconomic developments in Q1FY27.

Persistent earnings downgrades would also weigh on India's premium valuation. In this decade, India has traded at an average one-year forward P/E of 20x, materially above the 2010-2020 average of 15x. A preliminary assessment implies an average 4% reduction in India's EPS, which would translate into a revised target of ~26,600, assuming a 1x compression in the forward P/E to 19.5x.

Overall, the medium-term set-up looks constructive. Based on Thursday's close, a nominal return of 15% to 20% appears feasible, assuming the conflict concludes during April to May. The decline has extended into April and has taken the Nifty 50 index to a new intraday low of 22,182, which is 16% below the 52-week high recorded in January.

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