Market rally: What’s fuelling gains and what are the risks?

If the stock markets have been disappointing you over the past two years, the past few days may have come as a pleasant surprise. The Nifty and the Sensex have gained 9.1% and 9.58% in November thus far (as of 13 November), giving investors a reason to smile again and also driving home a basic stock market lesson.

Markets go through both good and difficult phases, and the best way to tide over market vagaries is through asset allocation. In the case of the recent rebound, the rally was triggered by a combination of factors, but there are also some risks still lurking that investors should be watchful of.

Fund managers’ take

“A combination of factors seems to be favouring India right now. India-specific, the economy is healthy and corporate earnings in H1FY27 reflect good growth. On the macro front, there now seems to be a slowdown in the AI trade, which is positive for India, and the talks of de-escalation in the US-Iran, which has helped in cooling crude prices, a positive for India’s BoP (balance of payments) and the currency,” said Krishna Sanghavi, chief investment officer-equities, Mahindra Manulife Mutual Fund.

“The trajectory of India's corporate earnings has been positive and resilient. Six quarters ago, earnings growth for the NSE 500 (ex-commodities) was about 7% over the previous year. It then rose to 9-10%, and reached 18% in the June quarter and 22% in the September quarter," pointed out Neelesh Surana, chief investment officer, Mirae Asset Mutual Fund.

Earnings growth has made valuations look more reasonable, according to Harsha Upadhyaya, chief investment officer, Kotak Mutual Fund. “While the headline indices have largely been range-bound over the last two years, the earnings have improved, making valuations look more reasonable. The large-caps still remain below their long-term average valuations,” he said.

Within markets, the large-cap segment is where most fund managers are positive on. “Historically large caps have formed a significant portion of FPIs portfolios. So when FPIs were selling India holdings, large-caps faced selling pressure leading to price falls. . So, if the recent revival of FPI inflows continues, large-caps should benefit,” Sanghavi explained.

FPIs have net bought ₹84,291 crore worth of equity shares in November so far (as of 12 November), as per data from National Securities Depository. Up until then, FPIs had net sold equities worth close to ₹3 trillion between January and October 2026.

Rahul Singh, chief investment officer-equities, Tata Mutual Fund, said the question marks surrounding the AI theme play in favour of Indian markets.

“India’s corporate earnings, especially in large-caps, have recovered and are driven by multiple factors. It’s not just one sector or theme that’s driving the recovery. Even in the US, a lot of earnings growth was on account of big tech companies and AI. India’s earnings pool is relatively well-diversified with a high return on equity (RoE), which translates into equity returns over the long term,” he said.

Higher RoE indicates that the company is able to deliver higher profit per rupee of shareholder capital.

“These features of Indian markets tend to get overshadowed when one global theme starts to dominate or when risks from higher crude prices manifest,” Singh added.

He also pointed out some risk factors. “The key risks are how the monsoon and rabi crop pan out, and what that means for rural consumption. While crude prices have come down, metal prices have not; overall commodity prices remain 20–30% higher than before the war," Singh said.

"That is already visible in recent earnings, with margin pressure across companies and not all of them able to pass on higher costs. If rural demand remains weak and the rabi crop disappoints, the combination could weigh on profit growth next year. That’s a risk we need to watch out for,” Singh added.

What brokerages say

HSBC Global Investment Research has upgraded India to overweight compared to benchmarks. “Following a multi-year valuation reset and significant underperformance to EM (emerging markets), we now raise Indian equities to overweight. We see strong credit growth, resilient earnings and measures supporting growth and the currency. While the coming quarters could see modest downgrades if energy prices remain elevated (prices have eased a bit to $99/bbl at the time of writing), we don’t expect these to be significant enough to affect overall sentiment," the brokerage said in its report.

India offers diversification and low volatility in Asian markets dominated by AI stocks, according to the report.

“High valuations relative to regional peers had already dampened foreign investor sentiment towards Indian equities before the current geopolitical risks emerged. India remains the region’s most expensive market, but its valuation premium has narrowed. Large-caps have de-rated significantly and now look less stretched relative to their own history and the broader Indian market," the report said.

The FTSE India is trading at about 19 times forward earnings, broadly in line with its long-term average. India’s valuation premium over regional peers fell to one standard deviation below its historical average last month, before recovering slightly, the report added.

Citi has pegged its target price for the Nifty at 28,000 by December 2027, which suggests a 12% upside from current levels.

The brokerage sees a fall in crude prices as a significant boost. “A $10-per-barrel decline in crude could narrow India's current account deficit by 30 to 40 basis points,” Citi said in its report.

Jeffries, in its Greed & Fear note, said that India’s weighting will be adjusted, increased by two percentage points to maintain the brokerage’s overweight stance.

“We are constructive on markets after the recent developments. What needs to be watched out for is the geopolitical risks if they escalate again, and how the rabi harvest season impacts rural incomes and its impact on consumption demand,” said Pankaj Pandey, head of research at ICICI Securities.

What investors should do

Financial planners say that investors should stick to their goals, timelines and asset allocation. “We saw clients taking money off the table when markets were correcting, disappointed with the returns over the last two years. And now when markets have recovered, they are missing out," said Surya Bhatia, financial adviser at Asset Managers.

Bhatia said this is a lesson: when it comes to investing in equities, you need to maintain a long-term investment horizon. You can’t time your investments.

“Investors that are bearish can stagger their investments over a longer period. Investors that are bullish can stagger it over a shorter period. Investors should maintain a diversified mix of large-, mid- and small-caps in their investment portfolio. Given large-caps showing more attractive valuations, investors can keep large-cap as 50% of their overall portfolio and the remaining can be equally split between mid- and small-caps,” he added.

Investors who were sitting out during this period of uncertainty and wish to deploy now can do so via systematic transfer plans (STPs) or aggressive hybrid funds, according to Amol Joshi, founder of PlanRupee Investment Services.

“Through STPs investors can deploy their capital in a staggered manner. For investors looking to deploy money now, aggressive hybrid funds may be worth considering. They offer around 65-70% equity exposure, with automatic rebalancing. If markets rise, investors participate in that upside; if markets soften and the equity allocation falls, the fund can move money from debt into equities according to its mandate.”