Stock markets begin 2025 with an upbeat note. Here's how the year is expected to turn out

Equity markets have been correcting over the last two to three months from their lifetime highs in September, but 2024 was still a good year for investors. The benchmark BSE Sensex and the wider NSE Nifty50 ended around 9 per cent higher last year; it was the ninth consecutive year that markets had clocked gains.

Markets began 2025 on a positive note too, with Sensex closing 368 points or 0.47 per cent higher at 78,507.41 on January 1. The Nifty50 also ended up, gaining 98 points or 0.41 per cent to close the day at 23,742.90 level.

Shares of select automobiles, banks and engineering and capital goods makers were among the gainers on Wednesday. Maruti Suzuki and Mahindra & Mahindra were the top two gainers on the Sensex, as investors gave a thumbs up to their good December wholesale numbers. Banking stocks were also in demand, with IndusInd Bank, Axis Bank and HDFC Bank rising around 1 per cent.

"An uptick in core sector data and prospect of ramp-up in capex spending by the government in the remaining part of the fiscal aided sectors like capital goods, industrials, auto and power," said Vinod Nair, head of research at Geojit Financial Services.

While 2024 may have been another positive year for stocks, it ended with benchmark indices declining over 8 per cent since their peak, amid heavy selling by foreign investors between October and December. Overall for 2024, foreign portfolio investors were net buyers of stocks worth only Rs 427 crore, a fraction of the Rs 1.71 lakh crore they had invested in 2023, data from NSDL showed.

There were multiple challenges markets faced last year. Escalated geopolitical tensions in the Middle East and continued battle between Russia and Ukraine made investors nervous. Republican Donald Trump wining US Presidential elections and his talk of import tariffs, and the disruptions that they would likely bring to global trade in 2025, also made investors jittery.

Domestically, the slower-than-expected GDP growth in the July-September quarter and the lackluster corporate earnings growth during the same period, were also major concerns, at a time when valuations in many pockets were looking really stretched.

How corporate earnings growth pans out in the October-December quarter will be a key thing investors will be looking out for in the next few weeks. With the elections out of the way, the central government too is expected to boost its capex spending through the remainder of the current financial year, which is also something that will be closely watched.

Major global central banks like the US Federal Reserve slashed interest rates several times towards the end of 2024, signaling the fight against inflation was largely over and interest rates were likely to fall further.

However, by signaling lower than expected rate cuts in 2025, the Fed also ended the year on a cautionary note. Back home, the Reserve Bank of India turned neutral and reduced the cash reserve ratio (CRR), but left benchmark repo rate unchanged at 6.50 per cent, amid volatile food prices. With a new governor in charge, how the central bank navigates sluggish economic growth and inflation in the coming months will be also something to watch out for.

"The uncertainty surrounding Trump's economic policies and high valuation may impact the stock market in the short term, particularly in emerging markets. There are no signs of (global) recession, though tapering could influence valuations. A balanced approach, including specific stocks and sectors, along with investments in gold, silver, and debt instruments, is essential for portfolio stability," said analysts at Geojit Financial Services.

Liquidity, growth and inflation surfaced post monetary and fiscal expansion in 2020-21 during the Covid-19 pandemic in that order, pointed Canara Robeco Mutual Fund and will reverse in the same order during 2025-26, it believes.

If FIIs continue to sell in 2025, it could continue to pressure emerging markets, including India. However, strong domestic retail inflows in stocks and mutual funds will cushion that to an extent.

"Current monthly SIP Book of MFs in India is Rs 25,300 crore and should provide good support to the markets in case we witness continued FII withdrawals," the fund house pointed out.

Real estate, healthcare and pharma were among the sectors that gave strong returns in 2024 and Canara Robeco remains positive on them in 2025 too. While it expects healthy volumes driven by project launches to aid realty, it foresees steady double-digit earnings growth for pharma and healthcare.

It also remains positive on the infrastructure space, expecting healthy public spending, while it sees banks attractively valued for growth. Fast moving consumer goods companies delivered lackluster growth in 2024, amid concerns of slowing urban demand. Still, Canara Robeco is positive, citing attractive valuations from a medium-term perspective.

"Capital expenditure by the government till October 2024 stood at Rs 4.66 lakh crore, only 42 per cent spent of budgeted Rs 11.11 lakh crore for FY2025. With the government stepping up investments in the second half, sectors such as infrastructure, defence and railways may witness recovery. FMCG, badly hit by urban consumption slowdown, could witness recovery as valuation looks attractive," said Deepak Ramaraju, senior fund manager at Shriram AMC.

Analysts at ICICIdirect.com, the retail broking arm of ICICI Securities, believe "recent correction offers good entry point" to start accumulating stocks for long-term wealth generation. The analysts expect Nifty 50 earnings to grow at a 15 per cent compounded annual growth rate over financial years 2025-2027.

"However, the focus going forward should be to invest in companies with certainty of growth longevity, healthy balance sheets, less susceptible to foreign shocks, capital efficient business models," they advised.