Morgan Stanley has concluded that Indian equities have probably reached a low point and are set to generate substantial returns in the year ahead, driven by an anticipated acceleration in earnings growth together with improving valuations and investor sentiment.
The investment bank said it sees Indian corporate earnings entering a new upcycle and expects that the acceleration in earnings will persist for several quarters even as markets contend with near-term headwinds. Specifically, Morgan Stanley identified potential short-term risks from a prolonged conflict in the Middle East and the prospect of severe drought during the upcoming summer sowing season.
Looking past those immediate concerns, the bank forecasts that investment as a share of GDP will increase to 37.5% over the next five years. Morgan Stanley attributes that rise to a wave of capital spending across sectors including energy, defense, semiconductors, fertilizers and data centers, which it views as central to the earnings momentum.
On macro policy, the firm described the environment as supportive: it cited an undervalued currency, modest real interest rates and fiscal stability as factors that underpin the outlook for corporates and markets. In addition, Morgan Stanley highlighted that India’s share of global profits now exceeds its weight in global equity indices by the widest margin on record, excluding 2009.
For equity investors, the bank pointed to several market dynamics that it believes bolster the case for Indian stocks: broad-based growth acceleration across the economy, robust domestic equity flows, an emerging pipeline of initial public offerings, the worst trailing 12-month relative performance on record for India, relative valuations at prior lows and multi-year low foreign positioning.
Morgan Stanley noted that India accounted for 18% of global GDP growth in 2025, and expects that contribution to rise in coming years. The firm also stated that if India can sustain 12% nominal growth, the equity market could produce strong returns through the end of the decade.
At the sector level, the bank recommends an overweight allocation to financials, consumer discretionary and industrials, while advising underweights in energy, materials, utilities and healthcare. Morgan Stanley expressed a preference for domestic cyclical sectors over defensive and external-facing sectors.
Within the technology complex, the bank identified information technology services as a potential outperformer as global companies increasingly turn to these firms to build artificial intelligence applications and solutions.
Despite the constructive case, Morgan Stanley listed other risks that could temper the outlook, including elevated geopolitical tensions, slowing global growth, low agricultural productivity, constraints in judicial capacity and possible labor market disruption stemming from AI adoption.
Overall, the bank’s analysis balances a positive earnings trajectory and improved policy backdrop against a set of identifiable geopolitical and domestic vulnerabilities, and it advises portfolio tilts accordingly.