Highlights
- Nuvama warns of further correction despite cheaper stock valuations.
- High interest rates and oil prices threaten earnings growth.
- Large-cap stocks preferred over small- and mid-cap equities.
Stock Market Outlook: Indian stock markets could face further correction despite cheaper valuations over the past two years, according to brokerage firm Nuvama Institutional Equities. The brokerage has warned that rising interest rates, high crude oil prices and risks to corporate earnings could keep markets volatile in the coming months.
In its strategy report titled Valuations: A rate check, dated October 19, 2026, Nuvama said that Indian equities have become cheaper after nearly two years of largely flat market performance, even as corporate earnings grew. However, the brokerage cautioned that cheaper valuations do not necessarily mean that stocks are attractive for investors.
The report, included in Nuvama’s October 21 First Call publication, said that Indian equities remain expensive when compared with bond yields. It also warned that further declines in valuations are possible if corporate earnings weaken.
Indian stock market valuations: What does Nuvama say?
According to Nuvama, the NSE 500’s one-year forward price-to-earnings (P/E) ratio has fallen to 18 times, compared with 24 times in September 2024.
The current valuation is broadly in line with its 20-year historical average.
However, the brokerage said that stock market valuations do not always stop falling once they reach their long-term averages. In some cases, valuations can fall below historical levels after a period of high valuations.
Nuvama also highlighted that domestic institutional investor (DII) inflows may not always support market indices, particularly when the money is being used to buy shares sold by promoters.
The brokerage believes that interest rates and corporate earnings will play an important role in deciding whether Indian equities become attractive.
Why could Indian stock markets fall further?
Nuvama said that interest rates have increased significantly over the past two years, making equities relatively less attractive.
According to the report, the average cost of capital, measured using Indian and US 10-year government bond yields, has risen by around 100 basis points since September 2024.
As a result, Indian equity valuations, when compared with interest rates, remain close to the high levels seen in 2007 and 2024.
The brokerage warned that unless corporate earnings remain strong, stocks could face further valuation declines.
Five key risks for Indian stock markets
Nuvama identified several factors that could put pressure on stock markets and corporate earnings.
- High crude oil prices: A prolonged rise in crude oil prices could increase costs for companies and reduce their profit margins.
- Rising interest rates: Higher interest rates, along with weak household incomes, could affect domestic demand and economic growth.
- El Niño concerns: Weather-related risks and the fading benefits of GST rate cuts could create additional challenges for domestic demand.
- Slowing AI investment growth: Nuvama said that the pace of growth in artificial intelligence-related capital expenditure is reaching a peak. This could affect Indian companies through currency movements, metal prices and machinery exports.
- Risk of earnings cuts: The brokerage warned that these factors could lead to cuts in corporate earnings estimates, similar to those seen during 2024–25.
According to Nuvama, these risks could affect corporate earnings during the second half of FY27.
Which stocks and sectors could face more pressure?
Nuvama believes that small- and mid-cap stocks could be more vulnerable if market conditions worsen.
The brokerage also identified several cyclical sectors that could face pressure, including:
- Automobile companies
- Industrial companies
- Metal stocks
- Public sector banks
Nuvama also raised concerns about the global artificial intelligence investment cycle.
The brokerage said that high valuations, increased retail participation using borrowed money and consolidation in semiconductor stocks show similarities with the later stages of the dot-com boom.
It warned that rising interest rates could put pressure on AI-related stocks, potentially affecting broader market sentiment.
Nifty outlook: Why does Nuvama prefer large-cap stocks?
Given the risks to markets, Nuvama has maintained its preference for large-cap stocks over small- and mid-cap companies.
The brokerage also prefers defensive sectors over cyclical sectors.
Nuvama believes that large-cap stocks and defensive businesses could be relatively better positioned during periods of high interest rates and weaker earnings growth.
The brokerage has also maintained its preference for the Nifty over emerging-market equities.
What could ease stock market volatility?
According to Nuvama, two developments could help reduce pressure on Indian equities.
The first is an easing of the crude oil price shock, which could reduce pressure on corporate profit margins.
The second is monetary easing by the US Federal Reserve, which could bring down bond yields.
However, the brokerage cautioned that a decline in bond yields caused by an economic slowdown would not necessarily benefit stock markets.
Nuvama said investors should remain prepared for volatility unless the oil price shock eases or the Federal Reserve cuts interest rates.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money-related decisions.)