Stock markets in correction phase: More turbulence ahead on Dalal Street?

The bulls on Dalal Street are catching their breath. After a spectacular rally through most of 2024, Indian stock markets have hit a rough patch, with both benchmark indices diving into correction territory.
The Sensex and Nifty have tumbled nearly 10% from their recent peaks, leaving investors wondering: Is this just a healthy pause, or should they brace for more turbulence?
The scale of the pullback is striking. The Sensex has plunged 8,553 points (10%) from its September 29 peak of 85,978.25, while the Nifty has shed 2,744 points (10.44%) since touching 26,277.35 on September 27.
Yet, 2024 isn’t a complete washout – the Sensex still holds onto a 7.34% gain year-to-date.
The biggest culprit behind this market correction has been the exodus of foreign portfolio investors (FPIs).
October saw a staggering Rs 94,017 crore in FPI outflows, and November’s first half added another Rs 22,420 crore to the retreat.
FPI holdings in Indian stocks have dropped to a 12-year low.
The market’s premium valuations are facing a reality check as corporate earnings fail to keep pace.
According to analysts at JM Financial and Jefferies, more than 60% of companies under their coverage have seen FY25 earnings downgrades following tepid Q2 results.
As Vinod Nair of Geojit Financial Services explained, the market’s rich valuations are under scrutiny as earnings growth struggles to justify the high multiples.
However, there’s a silver lining in this cloudy scenario. Domestic mutual funds have stepped up as market stabilizers, with October seeing mutual funds pour Rs 90,000 crore into equities. This helped absorb the heavy selling pressure from FPIs.
Market experts offer a mixed but generally optimistic outlook. Jefferies views the correction as a healthy reset, particularly for overvalued segments.
Trideep Bhattacharya of Edelweiss AMC told The Economic Times that markets could remain volatile till January’s Q3FY25 earnings reports. He also indicated that the second half of FY25 could see improvement driven by government initiatives, benefits from good monsoon, and expected rural recovery.
Meanwhile, Morgan Stanley maintains its bullish stance on Indian equities, projecting low double-digit returns over the next decade. However, the market’s path forward will be shaped by RBI’s interest rate decisions, global commodity price trends, and ongoing geopolitical tensions.
While the correction might be testing investor patience, it could also be setting the stage for the market’s next leg up.
The upcoming December quarter earnings season will be crucial in determining market sentiment, with investors closely watching for signs of recovery.
With domestic institutional investors providing stability and the possibility of FPI flows normalising, the market correction might find its bottom sooner rather than later.
(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)