Morgan Stanley analysts predict that the Indian market's next rally will be significantly influenced by the upcoming April–June quarter corporate earnings and the monsoon's performance, while also highlighting the long-term potential of AI for India's labour productivity.
Key Points
- Morgan Stanley forecasts the next market rally will be propelled by Q1FY27 corporate earnings and the monsoon, favouring domestic cyclicals over defensives.
- The firm maintains a June 2027 Sensex target of 89,000, with a 50 per cent probability, and sees potential for 100,000 in a bull-case scenario.
- AI poses a near-term risk to India’s services-export momentum but offers substantial long-term labour productivity gains.
- India's cumulative outperformance against the MSCI EM Index has shifted to underperformance, with its valuation premium over EM compressing to a historic low of 18 per cent.
- Global capital rotation towards AI-driven Big Tech companies is identified as a key factor for India’s recent market underperformance.
The next leg of the market rally will be driven by how the April–June quarter (Q1FY27) corporate earnings season and the monsoon play out, said analysts at Morgan Stanley in a recent coauthored note, led by Ridham Desai, managing director (MD) and chief India equity strategist.
Morgan Stanley favours domestic cyclicals over defensives and externally-facing sectors.
Its overweight sectors include financials, consumer discretionary and industrials.
It remains underweight on energy, materials, utilities and healthcare.
AI's Role and Market Catalysts
“IT services may prove the dark horse as the world turns to these firms to build artificial intelligence (AI) applications and solutions,” it said.
The principal catalyst for the market to move up, according to Desai, is how it gauges the growth gap between India and the world.
That view may shift if global sentiment turns cautious on AI capex and/or India’s growth accelerates.
“The coming quarterly earnings season should, therefore, offer useful signals, and we expect an upside surprise given strong high-frequency indicators.
"Investors may also watch the monsoon, though we do not share that worry,” wrote Desai in a coauthored note with Nayant Parekh.
Sensex Targets and Probabilities
As a base-case scenario, they have maintained June 2027 Sensex target at 89,000 levels, up nearly 14 per cent from the current levels.
Morgan Stanley attaches 50 per cent probability to this forecast.
In its bull-case and bear-case, Morgan Stanley sees the Sensex at 100,000 and 66,000 levels, respectively, by June 2027, and attaches a 25 per cent probability to each of these forecasts.
AI & Near-Term Risks
Meanwhile, Morgan Stanley said AI poses a near-term risk to India’s services-export momentum but, over the medium term, offers a substantial chance to lift labour productivity from a low base. Longer-term growth, it said, is further underpinned by a multi-polar world that can expand India’s share of global goods trade and a marked pickup in investment.
“We read the de-rating as cyclical — the product of a sharp gap in relative growth.
"India’s growth looks to have bottomed and is now trending higher, yet still trails that seen... in economies tied to the AI capex cycle,” Desai and Parekh said.
India vs Peers
Meanwhile, India’s cumulative outperformance compared to the MSCI EM Index of +10 per cent (between June 2021 and September 2024 peak) has swung to an underperformance of -40 per cent (between the September 2024 peak and June 2026), said Motilal Oswal Financial Services (MOFSL).
Simultaneously, India's valuation premium over emerging markets (EM) has compressed to a historic low of 18 per cent in June 2026, significantly below its long-term average of 73 per cent and CY22 peak of 147 per cent.
A key factor for India’s underperformance in recent times, MOFSL said, has been the sharp global capital rotation towards a group of AI-driven Big Tech companies and related beneficiaries.
This has left non-AI markets, such as India, bearing the brunt of this shift.
