A much-discussed topic in stock market circles now is India’s underperformance this year relative to other major markets. While the MSCI World Index is up by 17 percent year-to-date (YTD), Nifty is up by only 9.79 YTD as on 21st November. Compared to outperformers this year like S&P 500, Shanghai Composite, Hang Seng, Nikkei and Kospi, the underperformance is huge – the worst in the last 30 years. However, the picture completely changes when we consider the performance of the last five years, during which, India has been the best performing market. Nifty returns during the last 5-year period ending 21st November 2025 stand at 101 percent vs 12.52 percent for Shanghai Composite, – 6.23 percent for Hang Seng, 56.33 percent for Euro Stoxx 50, 46.32 percent for Kospi, 81.84 percent for S&P 500 and 82.5 percent for Nikkei. This is a significant outperformance. Investors should be focusing on this long-term trend, rather than worrying about underperformance in one year. Temporary downtrends in market returns are par for the course.
The fundamental factor that impacted market returns this year was the sharp dip in earnings growth. FY21 – FY24 witnessed an impressive 24 percent CAGR in earnings growth. The Nifty rally from 7511 in March 2020 to 26216 in September 2024 had the fundamental support from this impressive earnings growth. This fundamental support weakened significantly when earnings growth dipped sharply to 6 percent in FY25. The correction in Nifty from the September 2024 high of 26216 was a rational response to the dip in earnings growth. Stock market experience tells us that when market valuations stretch above the long-term trend, a reversion to mean is inevitable. The correction and consolidation in the market during the last one year was this reversion to mean.
Another major contributor to the underperformance of India has been the global AI trade. Optimism and enthusiasm surrounding AI and its earnings potential had triggered a huge rally in AI-related stocks. The ferocity of this rally made the chip leader Nvidia the most valuable company in the world with its market cap soaring beyond $5 trillion. Other ‘AI gainers’ like China, Taiwan and South Korea also benefited from this AI rally. India, regarded as an ‘AI loser’, did not participate in the rally. Worse, FIIs, particularly hedge funds, sold heavily in India and used the proceeds to ride the AI trade.
Now, these two factors – the pedestrian earnings growth and the AI trade – are changing. India’s earnings growth has started picking up from Q2 FY26 and is likely to improve in Q3 and Q4. Nifty 50 has the potential to deliver earnings growth of around 15 percent in FY27. This can provide the fundamental support for a potential rally in the market, helping Nifty and Sensex to set new records. Meanwhile, the AI trade is slowly fading, facilitating a return of FIIs into markets like India and into non-AI stocks.
A concern, however, is the sustainability of economic growth and earnings growth, going forward. The festival season has begun well with a big boost in consumption. The massive fiscal stimulus provided this year – the income tax cuts given in Budget 2025 and the GST cuts and rationalization – supplemented by the bold monetary stimulus of 1 percent cut in interest rate, have provided the perfect macro boost for growth and earnings revival. For the market to set new highs and the rally to sustain, the consumption revival has to continue beyond the festival season. So, watch this space.
