Market in limbo: May wait for direction till February

On Friday, both Nifty 50 and S&P BSE Sensex ended about 1% higher at 24,131.10 and 79,802.79 points respectively.

“Today’s up-move seems like a bounce from the monthly expiry led correction yesterday,” said Gaurav Dua, senior VP & head-Capital Market Strategy, Mirae Asset Sharekhan.

Sneha Poddar, VP-research, Wealth Management at Motilal Oswal Financial Services, said, “The market seems to be taking a breather, and we might have to wait until February for a clearer direction.”

What could probably drive market movements going ahead would be a range of short-term news flow, including geopolitical developments, key economic indicators like gross domestic product (GDP) growth, or US economic data that might provide clues about the pace of interest rate cuts by the US Federal Reserve. Additionally, two major events on the horizon—the swearing-in ceremony of the US president-elect and India’s Budget—are likely to provide a clearer market trend, she added.

“Until then, the Nifty is expected to consolidate within a broader range of 23,500 to 24,500,” said Poddar.

In the past one month, the Nifty 50 has dropped 1.4% while the Sensex is down 0.7%, whereas the Nifty Midcap 100 and Nifty Smallcap 250 are up 0.3% and 2.5%, respectively.

Dua of Mirae Asset Sharekhan believes that most of the price damage in large-cap stocks is likely behind us, suggesting that the Nifty could slip into a consolidation phase. “However, the pain may continue in the broader markets, as there are still pockets of stocks where valuations are still not comfortable,” he added.

Looking at the price-to-earnings multiple, which helps assess whether a stock or index is fairly valued, the Nifty Midcap 100 and Smallcap 250 are currently trading above their five-year average multiples. The Nifty Smallcap 250 is trading at 30.62, above its five-year average of 28.96, while the Nifty Midcap 100 is at 39.35, higher than its average of 37.37. This suggests that the broader market may be slightly overvalued.

Meanwhile, the Nifty 50 is currently trading at 22.52 times, lower than its five-year average of 24.49, which suggests there could be some room for upside.

During this period, the top-performing sectoral indices include Nifty Media, Nifty IT, Nifty Realty, and Nifty PSU Bank, which have gained 1-3%. On the other hand, Nifty Energy, Nifty Commodities, Nifty Metal, and Nifty FMCG have been the hardest hit, falling 2-5%.

Dhiraj Relli, MD & CEO of HDFC Securities, shares the view that markets are likely to remain choppy “as bullish bets meet cautious macroeconomic realities”. He explained that retail investors continue to inject fresh funds, pushing domestic investors to put money to work in the markets. However, weaker GDP growth and subdued corporate earnings exerted downward pressure on the markets. This tug-of-war creates volatility, with optimism clashing against economic headwinds, he said.

According to Relli, the sector that is likely to drive the rally moving forward is Banking, Financial Services, and Insurance (BFSI).

“Earnings growth is likely to be driven by the BFSI sector. Banks (private plus public sector) would mainly lead BFSI’s earnings, with 10% YoY growth. We find this sector is most reasonably valued, and as the Reserve Bank of India (RBI) starts cutting interest rates early in the next calendar year, the industry’s capital cost will come down, leading to higher credit growth,” he explained. Meanwhile, he noted that key events to watch in the near term include automobile sales numbers and the RBI’s monetary policy next week, along with the European Central Bank (ECB), Federal Open Market Committee (FOMC), and Bank of Japan (BOJ) monetary policies in the second week of December.

“An important issue to watch in the December meeting, in our view, will be the RBI’s take on banking system liquidity, which has tightened recently — likely driven by FX sales by the RBI, as foreign institutional investors (FIIs) sold a record $11 billion in Indian equities in October, and further $1.6 billion in November—thereby tightening financial conditions and pushing the inter-bank rate above the repo rate,” stated a Goldman Sachs report dated 29 November. The global brokerage expects the RBI to actively manage liquidity to realign the inter-bank rate with the repo rate, going forward.

Besides, all eyes are now on the earnings recovery in the second half of FY25, which will be driven by expectations of increased government capex, post-monsoon activities, a strong wedding season, and a potential rural demand pickup in the latter half of the year.

“The weak earnings growth and worsening cash flows warrant a cut in our target P/E,” as per a 23 November report by Emkay Global Financial Services. “We are not unduly alarmed though, as we see some of the factors—weak consumption, slow government capex—as temporary, and expect a bounce-back in FY26.”

The brokerage has cut its target for the bluechip index by 4% to 25,000 from 26,000.