Equity outlook for 2025 is cloudy, Nifty likely to end CY25 at 25,500, says BNP Paribas

Its Nifty 50 target of 25,500, reflects a little under 10% upside from the current market levels. Among the key challenges, the report suggests elevated food inflation, rising US bond yields strengthening the dollar against the Indian rupee, and climbing commodity prices.

The outlook for equities in 2025 appears “cloudy” with the benchmark Nifty 50 index likely to end the current calendar year at 25,500, as per BNP Paribas.

“Indian GDP growth has slowed, and high-frequency indicators have moderated through 2024,” stated the global financial major in its latest report, adding that while these indicators are showing signs of bottoming out, other headwinds remain.

Its Nifty 50 target of 25,500, reflects a little under 10% upside from the current market levels. Among the key challenges, the report suggests elevated food inflation, rising US bond yields strengthening the dollar against the Indian rupee, and climbing commodity prices.

“With elevated US bond yields, the appetite for buying expensive emerging market equities should remain low unless there are signs of a strong recovery in growth,” said the report.

Domestic investors continue to strengthen market

“FII holdings have reduced to 16% in 2024 from a peak of 20% during FY14-20,” the report said but added that despite this decline, FIIs still hold approximately $800 billion in Indian equities, making their continued selling a major risk.

The report noted that strong domestic flows remain critical for the market, especially for mid- and small-cap stocks, which have become more expensive relative to the broader market.

Earnings growth: Slowing momentum

“The Nifty 50 EPS more than doubled over FY20-24, recovering from a low base,” analysts observed. However, recent trends point to challenges ahead. “Over the last six months, we’ve seen broad-based earnings estimate cuts, and early indications for the Dec-24 quarter are not encouraging,” the report stated.

The Bloomberg consensus projects a 14% earnings CAGR for FY25-27, but BNP Paribas remains cautious. “This estimate appears optimistic and would require an improvement in the economic outlook,” the report warned.

Signs of economic recovery amid global uncertainties

While high-frequency indicators such as banking credit growth and GST collections slowed in 2024, recent data suggests stabilisation. “Indicators like credit growth, steel production, and auto sales have picked up after a weak third quarter in 2024,” the report said. The National Statistics Office (NSO) projects GDP growth of 6.4% for FY25.

Global factors, however, pose significant uncertainties. “The likelihood of increased US tariffs under President Trump’s policies could dampen global growth and tighten US Federal Reserve policies, negatively impacting the INR,” the report cautioned.

Despite these risks, India’s relatively inward-focused economy is better positioned compared to more trade-dependent nations, it added.

Sector preferences and valuation insights

Amongst sectors, BNP Paribas favours banks, consumer discretionary, industrials, passenger vehicles, and hospitals & diagnostics over consumer staples, microfinance, consumer durables, and two-wheelers.

Banks, they note, are particularly attractive due to their valuation and strong earnings growth outlook. Similarly, in the durables sector, the Fast-Moving Electrical Goods (FMEG) segment is preferred for its valuations.

Preference for large caps

Valuations for large caps, as per the report, have become more appealing. “The bond-earnings yield gap, a reliable indicator of forward market returns, has improved in recent months,” the report says adding that however, broader markets remain expensive, with many domestic-oriented sectors trading at significant premiums.

In 2025, the report estimates that there is a low likelihood of valuation multiples rerating and they expect market returns to track or slightly lag earnings growth.