Indian stock market likely to bounce back in second half of 2025, predicts Emkay; lists top stocks to buy

Indian equity markets are expected to face near-term weakness and heightened volatility in the first quarter of 2025, but a recovery is anticipated in the second half of the year, according to Emkay Institutional Equities, a division of Emkay Global Financial Services.

In a recent media webinar on the market outlook, Emkay projected that the Nifty could reach 25,000 by December 2025. The firm also expects foreign portfolio investor (FPI) selling to subside by the second quarter of the year as macroeconomic conditions stabilise.

Sectoral Outlook: Emkay’s Key Calls

Emkay maintained an Overweight stance on the Discretionary, Real Estate, and Healthcare sectors, citing expected demand recovery and improving macroeconomic trends. The firm remained Neutral on Industrials, IT, and Energy, while maintaining an Underweight stance on Financials, Staples, and Materials, pointing to structural concerns and valuation pressures.

According to Emkay, discretionary consumption is likely to recover within the next 2-3 quarters, supported by improving IT hiring, better liquidity conditions, and a rebound in retail lending. Additionally, government-led welfare schemes, particularly those targeting women, along with strong winter crop sowing, are expected to bolster demand in the consumption segment.

Emkay’s Top Investment Picks

Emkay highlighted key stock picks across market capitalisations, identifying opportunities in large-cap, mid-cap, and small-cap segments.

Small Caps: Stovekraft, Quess Corp

Capex Growth Trends

Emkay noted that capital expenditure (capex) growth, which witnessed a 31 per cent CAGR between FY21 and FY24, is expected to slow to 10-13 per cent due to election-related spending constraints. However, the firm anticipates a rebound in FY26 as policy certainty returns. While capital-intensive sectors may face near-term challenges, green energy remains a key growth area with continued investments expected.

FPI Selling To Taper Off Soon

FPI selling has weighed on Indian equities in recent months, but Emkay expects this trend to stabilise post-Q1CY25. As earnings forecasts bottom out and valuations moderate, investor sentiment is likely to improve. The firm also pointed to a peak in the U.S. Dollar Index (DXY), which should ease rupee depreciation concerns and support FPI flows into Indian equities.

Furthermore, the Reserve Bank of India’s liquidity injection could provide additional support to domestic markets, benefiting the BFSI sector in particular.

Corporate Earnings Outlook

According to Emkay, the earnings downgrade cycle is nearing its end, with consensus Nifty estimates for FY26 already adjusting downward by 3.9 per cent since January 2025. The firm remains optimistic about mid-teens earnings growth for FY26, driven by Financials, Metals, and Energy.

What Should Investors Do?

Providing insights on the market outlook, Nirav Sheth, CEO – Institutional Equities, Emkay Global Financial Services, said, “Markets tend to over-react and overextend on both the upside and the downside. The bottoming process is usually volatile, which we are currently witnessing. Our macros are solid, given the low and stable CAD, fiscal deficit under control, and a more accommodative monetary policy now. We estimate that the worst of the earnings downgrade cycle is behind us and expect a recovery in the second half of the fiscal—triggered by renewed government spending and tax relief-led consumption. It is time to buy.”

Adding to this perspective, Seshadri Sen, Head of Research and Strategist – Institutional Equities, Emkay Global Financial Services, emphasise that despite short-term headwinds, the structural investment case for India remains intact. 

“The shift in sectoral dynamics presents opportunities, particularly in Discretionary, Real Estate, and Healthcare, where we see strong growth potential,” Sen added.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.