Déjà Vu on D-Street: Is the Indian Market Swaying to the Tune of Narrative-Driven Euphoria Again?

The past few weeks have brought a festive mood to Dalal Street, as Indian equities displayed remarkable resilience in the face of mounting global and domestic headwinds. From reciprocal US tariffs and terror attacks in Pahalgam to Operation Sindoor and fresh tensions with Pakistan, markets not only absorbed the shocks but rebounded surprisingly, with the Nifty 50 gaining over 12% from its March lows.

Driving this rally was a cocktail of factors: a steady flow of foreign institutional inflows, growing confidence in India's long-term growth prospects, and hopes of India emerging as a beneficiary in the US-China trade uncertainties. However, optimism appears to be running ahead of reality.

Analysts at Kotak Institutional Equities (KIE) have sounded a note of caution. They argue the recent surge in equities fails to account for several looming risks: a turbulent global trade landscape, lack of real progress in India-US negotiations, a weakening corporate earnings trajectory, and expensive stock valuations. Put simply, the sharp upmove belies the fundamentals.

Beneath the surface, the market seems to be buying into a story not yet fully written. KIE notes that markets have priced in benefits from ongoing US trade talks, despite unresolved issues such as Trump's call for zero tariffs on all exports, including agriculture, and India's existing trade surplus with the US.

To be fair, India's macro picture has improved modestly in recent months, helped by softening crude oil prices, a stronger rupee, benign inflation, and improved capital flows. Yet, high-frequency data continues to flag weakness, particularly in earnings across sectors and market capitalisations.

The Q4 FY25 earnings season was also underwhelming. Nifty-50 net profits rose 7.5% on year, with most of the upside driven by banks and downstream oil marketing firms. Consumer companies faced sluggish volume growth and margin pressures, investment-heavy businesses struggled with profitability, banks reported muted credit growth, and IT services flagged ongoing demand softness.

In this context, valuations have crept into uncomfortable territory. Large-caps are now trading at or above fair value, mid and small-caps look stretched, and a segment of so-called "narrative stocks" are trading at frothy levels, KIE highlighted. The renewed enthusiasm around defence and railway stocks highlights how easily markets can be swept up by sentiment, often running ahead of fundamentals.

Market experts are urging caution. Vinay Paharia, CIO at PGIM India Mutual Fund, echoes this sentiment, advocating for a balanced view, acknowledging near-term hiccups while remaining constructive on the broader opportunity.

In sum, while India’s long-term growth story remains compelling, the market appears once again at risk of letting hope outrun reality. For investors, the message is clear: stay grounded, and don’t lose sight of valuations in a market increasingly fuelled by narrative rather than numbers.