Morgan Stanley says India equity market bottom may be behind us, sees earnings upcycle lasting several quarters

Morgan Stanley’s equity strategists Ridham Desai and Nayant Parekh said in a June 1 note that the bottom for Indian equities may be behind us, with earnings growth acceleration likely in the pipeline and valuations and sentiment coming off near extremes, setting up what they describe as a potentially strong year ahead for Indian markets.

The brokerage characterises India as a defensive growth market and says Indian earnings are once again in the throes of an upcycle. The key short-term risks it identifies are prolonged strife in the Middle East and a severe drought from bad weather in the coming summer sowing season. Beyond these near-term hurdles, Morgan Stanley expects the earnings growth acceleration to last several quarters, driven by its strong conviction on capital spending across energy, defence, semiconductors, fertilisers, and data centres. It expects investments to GDP to rise to 37.5% in the coming five years.

The policy backdrop is described as supportive, with an undervalued currency, modest real rates, and fiscal stability providing a constructive macro environment for equities. Morgan Stanley also points to broad-based growth acceleration, strong domestic equity flows, an emerging IPO pipeline, the worst-ever trailing 12-month relative performance, relative valuations at previous troughs, and multiyear low foreign positioning as factors that together make for a compelling mix for equity investors. India’s share of global profits, the note adds, exceeds its global index weight by the highest margin since 2009.

**The long-term story and the AI question**

Morgan Stanley acknowledges that the lack of a direct AI play is the most persistent challenge to the Indian equity market’s global positioning, with potential AI disruption of Indian services exports an aggravating concern. Despite these challenges, it expects India to be a significant beneficiary in a multi-polar world, with manufacturing’s share in GDP rising over the coming decade. India contributed 18% of global GDP growth in 2025, a share Morgan Stanley expects to rise. It also flags India as one of the fastest-growing markets for energy infrastructure, potentially fuelling a data centre boom, and notes that given low labour productivity as a starting point, India stands to be a major beneficiary of AI-led productivity gains. If India can lift nominal growth to 12%, it says the equity market could be a strong compounder through the end of this decade.

Portfolio positioning

Morgan Stanley is overweight Domestic Cyclicals relative to Defensives and External-facing sectors. Within that, it is overweight Financials, Consumer Discretionary, and Industrials, and underweight Energy, Materials, Utilities, and Healthcare. The firm is capitalisation-agnostic. It flags IT services as a potential dark horse as the world pivots to Indian companies to build AI applications and solutions.

The key risks cited are mostly external, including geopolitical tensions and slowing global growth. Domestically, Morgan Stanley worries about low productivity in farming, capacity constraints in the judiciary, and embodied AI hitting labour markets.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Please consult a qualified financial advisor before making any investment decisions.