Stock market in 2025: While 2025 began on a strong note for Dalal Street, last Friday saw the Sensex plummet by 721 points by the closing bell. Despite this dip, Indian equity benchmarks had extended their gains into the new year, raising hopes that the markets might finally enter the much-anticipated correction phase. Thursday marked a significant rebound, with a nearly 2% rise—the best single-day increase in six weeks — fuelled by a surge in technology stocks on the back of optimistic third-quarter earnings projections.
The key question for investors now is: when will the Sensex reclaim its 2024 peak? Market sentiment hinges on upcoming corporate results for the December quarter and the Union Budget, which are expected to significantly influence market directions in the coming months.
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A look back at 2024
The Indian stock market saw a mixed performance in 2024. Starting at 72,271 points, the Sensex enjoyed a bullish trajectory for most of the year. Key milestones included crossing the 80,000 mark in July and breaching 85,000 in September, before sentiment soured and the rally reversed.
By year-end, the Sensex settled at 78,248 points on December 30, reflecting a 9% decline from its peak but still delivering an annual gain of 8.2%. While the headline index posted modest returns, the real winners were the small and midcap indices. The BSE Midcap index surged by 25.2%, and the smallcap index soared by 27.4%, underscoring the resilience and growth potential of these segments.
The late-year correction
The market’s correction began in September, driven by concerns over overstretched valuations and weakening economic indicators, particularly during the July-September quarter. Investors grew cautious as signs of a demand slowdown emerged, coupled with a subdued corporate earnings season and second-quarter GDP data pointing to a sharper-than-expected economic deceleration.
Foreign portfolio investors reacted sharply, pulling out funds amidst domestic challenges and a global portfolio rebalancing favouring China. While FPIs invested approximately $12 billion in the first nine months of 2024, heavy sell-offs in October and November slashed net investments to just $311 million for the year—a dramatic drop from $20.7 billion in 2023.
The Trump effect
The return of Donald Trump to the White House has created both optimism and apprehension among global investors. On the one hand, his pro-business policies are expected to benefit Corporate America and US assets, as noted by JPMorgan Chase’s prediction of US exceptionalism. On the other hand, Trump’s unpredictable stance on global trade and proposed tariff hikes—such as a 60% tariff on Chinese imports—pose significant risks to global markets, particularly emerging markets.
While inflation in the US is expected to remain contained, experts warn that the Federal Reserve’s path toward its inflation target may be prolonged. Interest rate cuts are likely to proceed more cautiously, impacting global liquidity flows. However, Wall Street’s consensus is that diversification into alternative assets like private markets and hedge funds may provide a buffer against uncertainties.
Emerging markets show resilience
Emerging markets have shown resilience, outperforming developed markets equities for two consecutive quarters in 2024. The Federal Reserve’s rate cuts and China’s stimulus measures have provided a supportive environment. For instance, the MSCI China Index gained 24% in September alone, boosting the Asia region’s performance. However, Trump’s proposed tariffs could significantly disrupt emerging market economies, especially those reliant on US trade.
China’s aggressive stimulus measures have spurred short-term growth, with sectors like consumer discretionary and communication services leading the gains. However, increased tariffs or reciprocal trade measures could severely impact China’s GDP, estimated to lose $770 billion if 60% tariffs are imposed. This could further accelerate China’s trade diversification, as seen in its reduced export dependence on the US (14% in 2023, down from 21% in 2018).
Stock market in 2025: Budget and policy catalysts
Domestically, the Union Budget and RBI’s monetary policy decisions are crucial in determining market trends. Clear fiscal and monetary policy direction will be pivotal in stabilising investor sentiment.
Indian investors are increasingly allocating funds to higher-risk equity mutual funds like small-cap, mid-cap, and sectoral funds. While these categories offer potential for high returns, their inherent volatility could amplify market swings, especially during economic or geopolitical shocks.
Global economic and geopolitical uncertainties, such as Trump’s trade policies, Middle East tensions, and South China Sea disputes, will shape the market’s trajectory. However, easing monetary policies in developed and emerging markets could provide tailwinds.
Investors must observe cautious optimism, emphasising diversification and prudent risk management. As India seeks to bolster growth in a challenging global environment, markets may deliver low double-digit returns over the next 12 months, provided policymakers address domestic and global challenges effectively.