Taking Stock: Q1 FY25 Equity Market Outlook

As we look back at the first few days of the new financial year 2024-25, the quarterly results announced by most companies remain the highlight of the season. However, the question on most investors’ minds is about the equity market outlook for FY25 — and more specifically, about how the first quarter of the new financial year may pan out in the equity markets. 

The broad market view is generally optimistic for the coming year because of the sustained momentum in the previous months. With India poised to become the world’s third-largest economy by 2027, foreign investments in the domestic equity markets are expected to chart an upward trajectory. In this article, we explore the general equity market outlook in the first quarter of FY25 and look into what could potentially dampen the overall positive forecast.

A Strong Start in the June Quarter

The equity markets had an excellent start in the first week of Q1 FY25. In the trading session on Monday (April 8, 2024), the S&P BSE Sensex rose to a fresh all-time high of Rs. 74,869.30 and the NSE Nifty 50 hit a new high of Rs. 22,697.30. These new peaks scaled by the benchmark indices reflect the overall optimism among traders and hint at a broadly positive equity market outlook. 

Most experts echo this sentiment and suggest that the market is currently riding on the rare combination of an overall bullish sentiment and high liquidity. This benefits both traders with a short-term market outlook and investors who are interested in the long-term market outlook.

Pre-Election Rally

The Lok Sabha elections have been scheduled to take place in 7 phases in the first quarter of FY25 and the results of the poll are also set to be declared within the June quarter. In the run-up to the big dates, the pre-election rally began strongly with the benchmark indices setting new records. 

This prevailing bullish sentiment is setting the stage for a potentially rewarding equity market outlook in Q1 FY25. Many experts and investors suggest that this upward-trending equity market stems from expectations of political continuity. With businesses and investors expecting the current favourable policies to continue, the bullish sentiment has been gaining momentum. 

Projections even expect the Nifty 50 to breach the 23,400 mark by the time the election results are declared in June 2024. This stems from a study of how the NSE’s benchmark index has historically performed during the previous 7 election years. The index typically corrects or bottoms out during the first quarter of the calendar year and then rallies by at least 14% by the results declaration date. 

This year too, the index bottomed out by 5% in January 2024 and experienced further minor corrections in February and March. So, the projections in keeping with the Nifty’s historical performance reveal a substantial rally by the election outcome date. 

GDP Growth and its Impact on the Equity Market Outlook

In its most recent Monetary Policy Committee (MPC) meeting, the Reserve Bank of India revised the GDP growth targets for FY25 slightly. For Q1 FY25, the GDP growth target shrunk from 7.2% to 7.1%, while for Q2, the target was revised from 6.8% to 6.9%. 

This adjustment indicates that the central bank has a slightly moderated expectation of economic growth in the first quarter of FY25. What this means for the equity market outlook is that conservative investors may interpret this as a sign of potential adjustments in growth dynamics in Q1. The market sentiment could reflect this caution and lead to a slightly tempered market outlook — which may potentially be offset by the highly optimistic pre-election rally. 

CPI Inflation Projections and their Impact on the Market

Earlier this month, the RBI also released its projections for CPI inflation for FY25. The central bank expects the CPI inflation rate to be around 4.5% for FY25 overall, with Q1 having the highest projected rate at 4.9%.

This higher-than-average inflation rate in the first quarter may slightly dampen investor sentiment and pull the equity market outlook down marginally. This is primarily because of concerns regarding inflation. That said, different sectors react differently to inflation. Some, like retail services and consumer goods, may face margin-related pressures if inflation drives up the input costs. Others, like commodities and real estate, may benefit from inflationary pressures. 

Sectors in Focus in FY25

To better understand the equity market outlook, you need to also study the sectors in focus. In Q1 FY25, sectors like banking, finance, cement, capital goods and metals are expected to draw attention because of strong rollovers. Conversely, a short squeeze is expected in other sectors like pharmaceuticals, automobiles, chemicals and real estate. 

True to investor expectations and the general market outlook, the NSE Metal Index showed promising moves with long build-ups in leading stocks like Tata Steel and JSW Steel. However, the NSE Pharma Index declined slightly. 

Is a Repeat of the FY24 Rally Possible?

FY24 saw remarkable rallies in the equity market outlook, and while the trading sessions in Q1 FY25 so far have indicated a continuation of the bull market, the question remains if the previous year’s trajectory will be repeated this year. 

While many factors like the pre-election market outlook and a strong start to the year support this possibility, others, like the RBI’s marginally cautious projections, may act as opposing forces. The equity market also needs to overcome other challenges like shallow rate cuts, geopolitical tensions across the world and the potential political short-term instability after the election outcomes. The overall trajectory of the equity market in the rest of the June quarter will depend on how these factors develop. 

Conclusion

The bottom line is that the consensus about the equity market outlook remains buoyant and hopeful for Q1 FY25. This sentiment rides on various optimistic projections about the overall long-term growth of India’s equity market. S&P raised the country’s growth forecast for FY25 to 6.8%. India’s total market capitalisation is expected to hit the $10 trillion mark by 2030. Furthermore, over 50 companies have filed their preliminary IPO documents with SEBI — so we may see issues worth over Rs. 1 lakh crore in FY25.

If you want to ride this optimistic wave in the equity market, you need to perform comprehensive research before picking stocks for your portfolio. Research 360 powered by Motilal Oswal can help you with this. You can check out the latest results from the previous quarter in the ‘Result Analysis’ section on this platform. What’s more, you can also use the ‘Industry Analysis’ feature to obtain detailed insights into each industry — and the key financial ratios of the top companies in the industry.