Key Points

From a contrarian viewpoint, this shift to neutral from underweight equities represents a healthier market outlook and better long-term entry points for investors, "though we are not yet ready to recommend overweight positions", said the SBI ‘Market Outlook’ report.

The Indian equities gained in May despite tariff uncertainties. Nifty and Sensex increased 1.7 per cent and 1.5 per cent (on-month), respectively. FPIs turned net buyers even as overall market breadth weakened.

The Q4 FY25 corporate earnings scorecard was modest (single-digit profit growth), but largely in line with expectations, which has helped to arrest incremental earnings, downgrades in May, according to the report.

Even as metals, healthcare, capital goods, PSU banks, and chemicals have recorded a healthy profit growth, weakness in private banks results, coupled with a drag from Oil and Gas (ex OMCs), put pressure on profitability.

"Earnings growth is expected at around 10.5 per cent in FY26. Revival in India’s economic growth and hence topline is critical for the expectations to be met," the report further stated.

In the context of the Indian equity market, valuations have become more reasonable after the recent decline in Indian 10-year bond yields and a de-rating in price-to-earnings multiples.

"Our preferred measure — the earnings yield to bond yield spread — now suggests modest valuations compared to last year's highs," the report mentioned.

“In our view, quality and long-term fundamentals will start getting rewarded versus narrative-based and, to some extent, speculative price action of the past year,” it added.

The current turbulence should bring the focus back on fundamentals.

"We remain of the view that increasingly the market will become more discerning and move back towards companies which have strong business models, long-term earnings growth visibility and sustainable cashflows,” according to the report.

Q4 FY25 real GDP came in at 7.4 per cent compared to 6.4 per cent in Q3, surpassing RBI’s and market expectations of 7.2 per cent and 6.8 per cent, respectively.

This growth was primarily driven by a sharp rebound in fixed asset investments and sustained momentum in agricultural activity, even as aggregate private consumption remained underwhelming.

"We expect India’s growth to be flat at 6-6.5 per cent in FY26. While the tariff troubles have been averted for now, global policy uncertainty is a risk to India’s growth," it added.

- IANS