Indian Stock Market Reaches New High, Morgan Stanley Remains Optimistic Amid Earnings Concerns and Oil Price Volatility

Morgan Stanley Remains Bullish on Indian Stock Market Despite Risks

Despite a slowdown in earnings and an oil price shock that has prompted other global brokerages to turn bearish on the Indian stock market, Morgan Stanley remains among the few bulls. The brokerage projects the BSE barometer Sensex reaching the 89,000 level in the next 12 months or so, signaling an upside potential of 15% through June 2027.

Morgan Stanley's equity strategist Ridham Desai has assigned a 50% probability to this base-case scenario, citing a number of factors that will drive Sensex higher. These include a turnaround from a six-quarter mid-cycle slowdown, backed by factors such as RBI rate cuts, bank deregulation and liquidity infusion, strong capex trends in energy, defence, semiconductors, fertilisers and data centres, among others, large tax cuts and relatively stimulating fiscal.

Sensex Target Signals Upside Potential of 15%

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The brokerage's Sensex target suggests that the Sensex would command a trailing P/E multiple of 23.5x, ahead of the 25-year average of 22x. This premium over the historical average reflects greater confidence in the medium-term growth cycle in India, lower beta, a higher terminal growth rate, and a predictable policy environment.

Key Factors Driving Sensex Higher

Morgan Stanley assumes earnings to accelerate after a turnaround from a six-quarter mid-cycle slowdown. The brokerage also expects robust domestic growth, steady global growth, and lower oil prices from the current levels. Additionally, India's share of global profits exceeds its global index weight by the highest margin ever since 2009, making the brokerage bullish on the India story.

Valuation and Foreign Positioning

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Morgan Stanley finds the trailing 12M relative performance at its worst in history and relative valuations at previous troughs, with foreign positioning at multi-year lows. However, the brokerage remains bullish on the India story, citing the country's growing consumer base and rising incomes of a relatively young population.

Sectoral Bets

Sectorally, Morgan Stanley is betting on domestic cyclicals over defensive and external-facing sectors, as key risks to India are mostly external, including geopolitical tensions and slowing global growth. The brokerage finds value in financial, consumer discretionary, and industrials, and sees IT services as a potential dark horse as the world pivots to these companies to build AI applications and solutions.

Comparison of Sectoral Bets

Bull and Bear Case Scenarios

In the bull case scenario, Desai sees Sensex at the 100,000 mark as it expects oil prices to go below US$80/bbl, resulting in better terms of trade. Reflation policies start to achieve success and result in higher growth estimates, with earnings growth compounding at 19% annually over F2026-29.

As of the bear case, Morgan Stanley expects a decline in Sensex to 66,000, mainly on account of higher for longer crude and hawkish central bank and a major slowdown in global growth.