Daily Voice: Markets to reclaim record highs in 2H2025, further earnings downgrades possible in Q4FY25, says this investment advisor

We think markets will end the year in a stronger position and potentially reclaim earlier record highs in the second half of 2025. CA has recently shifted its stance on equity markets from "Neutral" to "Overweight" in February 2025, indicating increased confidence in market prospects. The current P/E ratio for Sensex (20.4x) shows a 15.44% discount compared to its 5-year average, suggesting attractive valuations.

If yes, which sectors will be at the forefront of driving the market rally?

The sectors anticipated to lead the market rally in the near future include infrastructure and construction, healthcare, and information technology. Recent growth data from the core sector reflects positive momentum in the cement and steel industries, both of which play a crucial role in the development of infrastructure projects.

On the healthcare front, India's modernization is accelerating at an impressive rate, largely driven by the increasing involvement of private enterprises. In the information technology sector, although it is currently facing some challenges, the outlook remains strong. India is positioning itself as a significant hub for artificial intelligence talent, which bodes well for the sector's continued growth and expansion in the coming years.

Do you think the market is no longer concerned about the US tariffs? What are the next challenges expected in FY26?

The market remains concerned about US tariffs. The Trump administration has already applied tariffs on Canada, Mexico, and China, with potential additional tariffs on various sectors. India's steel export to the US declined by 38% during CY19 following the imposition of additional tariffs.

Key challenges for FY26 include the ongoing escalation of the trade war, which could disrupt global trade dynamics, and significant foreign investment outflows, with FIIs having withdrawn approximately $24 billion in the past six months, leading to potential instability in financial markets. Additionally, there is continued pressure on the currency, which could affect import costs and inflation. The banking system is facing liquidity challenges, making it harder for businesses and consumers to access credit. Furthermore, geopolitical tensions persist, adding uncertainty to the global economic outlook and potentially impacting regional stability and investment flows.

Are you bullish on the discretionary sector in the coming financial year?

Client Associates remains cautiously optimistic about the discretionary sector. While passenger vehicle sales are showing signs of revival, sales of two-wheelers and commercial vehicles have seen a decline in recent times. Several factors are expected to provide support for the sector, including anticipated wage growth, accumulated household savings, recent interest rate cuts (the Reserve Bank of India has reduced the policy repo rate by 25 basis points to 6.25%), and the latest round of income tax relief provided to consumers. These factors are likely to contribute to a gradual improvement in demand in the coming months.

Do you still see the possibility of earnings downgrades in the March quarter earnings?

Yes, further earnings downgrades are possible in the March quarter. Despite Q3 FY25 earnings growth of approximately 18.4% for Sensex companies, this figure drops to 9.8% when excluding Bharti Airtel's exceptional performance. About one-third of companies have reported negative earnings, and the Sensex is expected to report earnings growth of just 4.6% in FY25.

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