Can the Indian stock market bounce back in November or is the downward trend here to stay?

Indian stocks are currently experiencing one of the bleakest days in recent history, as a convergence of global and domestic factors continues to weigh heavily on investor sentiment, pushing the frontline indices to fresh monthly lows.

The Nifty 50 and S&P BSE Sensex, after suffering their worst monthly performance in over four years this October, have extended their bearish streak into November. Both indices fell by over 1% in Monday’s trade, underscoring persistent market weakness despite a positive close on Muhurat trading day.

Softening Q2 FY25 earnings are dampening market sentiment, suggesting that the Indian economy may be cooling. Many companies have reported results below expectations, prompting earnings downgrades from brokerage firms.

Last week, Jefferies noted that over 60% of the 98 firms it tracks have seen their earnings per share estimates downgraded following recent quarterly results. In its interim review of the Q2 FY25 earnings season, Motilal Oswal reported that earnings growth among the 166 companies it monitors declined by 8% year-over-year, marking the lowest growth in 17 quarters.

Among the 34 Nifty companies that have announced results thus far, earnings have remained flat year-over-year, compared to an estimated growth of 2%. This stagnation has been primarily driven by performances from ICICI Bank, Axis Bank, Bharti Airtel, NTPC, and HDFC Bank, said the brokerage. 

Vinit Sambre, Head of Equities, DSP Mutual Fund, stated that the markets have recently corrected by around 9-10%, with certain sectors like PSUs, engineering, and auto experiencing even sharper declines. He noted that the market had been on a strong upward trajectory, fueled by continuous earnings growth, but results for the September quarter have fallen short of expectations, leading to earnings downgrades. This disappointing performance is primarily due to reduced government spending and slow consumption growth, he added.

Weak Q2 earnings, combined with recent developments in China, have triggered a significant outflow by foreign investors, as they are reportedly redirecting their funds to markets with more attractive valuations. In October alone, Foreign Portfolio Investors (FPIs) sold ₹1.14 lakh crore of Indian equities, marking the largest monthly outflow on record.

Additionally, China’s potential stimulus announcement, expected on Thursday, could prompt further outflows from both bond and equity markets in India, as per the market experts.

Adding to the decline are signs of a slowdown in urban demand in India. Recent reports highlight that urban consumers are finding it increasingly challenging to maintain their standard of living, strained by rising living costs and food inflation, both of which are eroding the purchasing power of the middle class.

The recent decline in FMCG and auto sales during the September quarter clearly highlighted the slowdown. Vinit Sambre cautioned that if urban growth fails to pick up, it could pose further risks to both earnings and market performance.

In addition to domestic challenges, several global factors are significantly impacting the Indian markets. The US presidential election, taking place today, is creating an atmosphere of uncertainty, while diminishing expectations for a substantial rate cut from the upcoming US Federal Reserve are also weighing on investor sentiment.

The recent surge in the US Dollar index, combined with escalating tensions in the Middle East and the resurgence of crude oil prices, is further contributing to the market volatility.

Near-term weakness, long-term optimism

"Our base case outlook is that markets may experience some additional weakness in the near term, but we anticipate a potential recovery after the Maharashtra election and with the onset of the festive season in October, which could boost consumption," Vinit Sambre said. 

He also highlighted that populist policies in some states due to upcoming state elections may provide a lift to spending. According to Sambre, the next two quarters will be key in setting the direction for the markets, with added volatility from the US election expected to ease soon. 

On the technical front, Hrishikesh Yedve, AVP of Technical and Derivatives Research, Asit C. Mehta Investment Intermediates, noted that technically, the Nifty 50 formed a red candle on the daily chart, indicating weakness.

He observed that the index was able to defend its previous support level of 23,890 and has stabilised near the 24,000 mark. "As long as it holds above 23,890, a potential pullback could drive it towards 24,200–24,300," he explained. However, he cautioned that a close below 23,890 may prompt additional selling pressure, potentially testing the 200-day exponential moving average (DEMA) near 23,500.

Rupak De, Senior Technical Analyst, LKP Securities, said, "The Nifty has corrected below 24,000 as the index slipped from its recent consolidation pattern. Sentiment will likely remain weak in the short term or until it decisively moves above 24,100. It might extend its correction towards 23,650 and lower on the lower end. On the other hand, a decisive move above 24,100 could trigger a rally towards 24,500."

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.