Indian stocks, which have been experiencing intense selling pressure in recent sessions, are set to face more challenges as Goldman Sachs Group downgraded Indian equities to ‘neutral’ from ‘overweight,’ citing slowing economic growth that is impacting the outlook for corporate earnings, Bloomberg reported.
The group had previously raised Indian stocks to ‘overweight’ late last year, highlighting earnings growth over two years despite global macroeconomic headwinds. However, the weak earnings reported by companies so far for the September quarter have made them more cautious about Indian stocks.
“While we believe the structural positive case for India remains intact, economic growth is cyclically slowing down across many pockets,” strategists, including Sunil Koul, wrote in a note on Tuesday. Worsening earnings sentiment, an accelerating pace of earnings-per-share cuts, and a weak start to the September quarter results season indicate an impact on profits, Goldman Sachs said, as quoted by Bloomberg.
The analysts expressed concerns about high valuations and noted that a less supportive backdrop could limit the near-term upside for local shares.
The cautious stance underscores growing concerns over the sustainability of corporate earnings amid weakening consumer spending and rising commodity prices. India’s record stock rally is already showing signs of fatigue, with the benchmark NSE Nifty 50 Index sliding more than 5% in October, putting it on track for its worst month in over four years, the report added.
Earlier in October, Bernstein Societe Generale Group’s Asia quant strategists also downgraded Indian stocks, citing high valuations and predicting further upside for Chinese equities driven by a potential policy boost. The strategists shifted their call on India to ‘underweight’ from ‘neutral,’ highlighting concerns over continued foreign outflows and weak earnings expectations.
Economic Concerns
The downgrade comes amid signs of weakening consumer spending and rising commodity prices, which are expected to pressure corporate profits. Goldman Sachs strategists highlighted a deteriorating earnings sentiment and an increase in earnings-per-share cuts, particularly during the weak start of the September-quarter results season. The benchmark NSE Nifty 50 Index has already dropped over 5% in October, indicating market fatigue after a record rally.
Adjusted Targets
Goldman Sachs has lowered its 12-month target for the NSE Nifty 50 Index from 27,500 to 27,000, suggesting a potential upside of about 10% from recent levels. The current valuation of the index stands at 20 times its forward earnings, exceeding its five-year average of 19.4 times. Additionally, foreign investors have pulled out approximately $7.8 billion from Indian equities this month, marking the largest withdrawal since March 2020. This cautious stance underscores the need for investors to remain vigilant as market conditions evolve.
