Iran Ceasefire Lifts Sentiment, but Valuation Concerns Persist Amid Market Correction

Market Stability Hinges on Sustained Peace

The two-week Iran ceasefire has brought temporary relief to the markets, but the worst may not be behind us, according to Nilesh Shah, Managing Director at Kotak Mahindra AMC. Shah believes that future market direction will depend on actual de-escalation on the ground, rather than just a pause in hostilities.

Despite the recent correction in prices, valuation concerns persist, Shah believes. The market has not seen a meaningful derating, with the Nifty largely flat for nearly two years, while corporate earnings have continued to grow albeit in single digits. This has brought valuations to more reasonable levels, but they are not yet compelling enough for a broad-based rally.

Shah expects a stock-specific rally rather than a strong broad-based rally unless Foreign Portfolio Investors (FPIs) turn big buyers. He also does not expect any rate cut this year, as the RBI is likely to remain in a long pause mode.

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Market Outlook

Shah believes that the conflict is likely to end in a stalemate, with the US and Israel claiming victory due to their success in degrading Iran's nuclear capability and ballistic missile infrastructure. However, Iran will project victory by highlighting that the regime remains intact and continues to extract a "toll" on shipping through the region.

Shah expects indigenous defence spending to increase substantially, with potential procurement of around $500 billion over the next decade, largely focused on indigenous platforms. This will be a multi-year structural tailwind for the sector.

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Regarding inflation concerns, Shah is comfortable ruling out near-term spikes from energy, with oil futures in backwardation and pointing towards double-digit prices rather than triple digits. However, he expects GDP growth of around 6.5% in FY27, depending on actual oil prices and the permanence of de-escalation.

Overall, Shah believes that markets have got some breathing space, but sustainability depends on genuine peace, oil price stability, and corporate earnings delivery. He recommends staying selective, remaining invested in quality, and keeping adequate cash for opportunistic buying.