The Economic Survey 2025 raises significant concerns about a potential market correction in the US and its implications for the Indian stock market:
US Market Conditions
- The US stock market is characterized by elevated valuations, peak corporate earnings, and widespread investor optimism.
- The Shiller S&P 500 CAPE ratio is at its third-highest level historically, indicating potential overvaluation.
- There are concerns about the sustainability of US corporate profits, particularly due to their concentration among major tech companies.
Potential Impact on Indian Markets
- A correction in the US market could have a cascading effect on India, given the strong correlation between the two markets.
- Historically, when the S&P 500 corrected by more than 10%, the Nifty 50 posted negative returns in 21 out of 22 instances, averaging a 10.7% decline.
- The US comprises 75% of the MSCI World Index, making any correction likely to have profound ripple effects globally, including in India.
Risks for Indian Investors
- Many new retail investors who entered the market post-pandemic have never experienced a significant, prolonged market correction.
- The impact on sentiment and spending could be non-trivial if a correction occurs, given the increased participation of young, relatively new retail investors.
Mitigating Factors
- Increased retail investor participation in India has made the domestic market somewhat less sensitive to US market movements.
- The 5-year rolling beta between the Nifty 50 and the S&P 500 has steadily declined over the last four years.
- Indian markets have shown increasing resilience during periods of Foreign Portfolio Investor (FPI) outflows.
The Economic Survey emphasizes the need for heightened vigilance and careful monitoring of these trends, given the potential risks to the Indian stock market in 2025