The last two years have been a challenging and frustrating journey for Indian equity investors. The market has struggled to deliver meaningful returns.

In 2024 it started with elevated valuations, followed by uncertainty around Trump’s tariffs, persistent FII selling, rising crude oil prices, and geopolitical conflicts and tensions. One negative factor after another kept emerging, preventing the market from moving decisively higher.

So, after two challenging years, the big question is:

What lies ahead for Indian equities? Are we finally approaching the next phase of the market cycle?

When the war started in February, crude oil surged to around $102 per barrel, raising concerns about higher input and transportation costs and pressure on corporate margins.

However, Q1 earnings surprised positively. Several mid- and small-cap companies, along with blue-chip names like Axis Bank, ICICI Bank, Bajaj Finance, M&M and TCS, reported strong profit growth, with some delivering around 30% growth. corporate India has shown remarkable resilience, and the war's impact on earnings appears far lower than initially feared. That's a positive signal for Indian equities.

Valuations have moderated meaningfully, with several sectors and benchmarks now trading closer to or below their long-term averages. Sectors such as IT, banking & financial services, and real estate are looking increasingly attractive from a valuation perspective.

At the same time, FIIs have taken out nearly ₹4.5 lakh crore from Indian equities over the last two years. Even a modest reversal of this trend could provide a significant boost to Indian markets. We are also seeing sector rotation, with global investors moving away from relatively expensive pockets and looking for sectors where valuations are more reasonable and the risk-reward is favourable. If even 10% of the FII money that has exited returns to India, it could create a meaningful positive impact on Indian equity markets.

India is currently witnessing one of the lowest levels of FII participation in the Indian equity market in the last 15 years. Interestingly, this comes at a time when several global markets—including the US, Japan, Taiwan, South Korea and China—are trading at relatively elevated valuations.

Against this backdrop, India's fundamentals remain encouraging. GDP growth, GST collections, inflation, fiscal and current-account indicators, and corporate profitability remain supportive, while valuations have moderated meaningfully.

The combination of strong fundamentals, moderated valuations and the potential for renewed foreign flows makes the current setup increasingly constructive for Indian equities.