In his latest strategy report, Desai expects a combination of cheaper valuations, an upswing in earnings, and a supportive macro-policy mix to drive better equity returns over the next 12–24 months. The brokerage has a target of 95,000 for the Sensex in the base case scenario.
Morgan Stanley argues that trailing 12‑month equity performance is the worst in India’s recorded history on a relative basis, while valuation metrics such as its modified earnings yield gap are approaching past trough levels that have typically preceded strong market phases. On key relative gauges that compare equity valuations with short-term interest rates, the firm says the indicators have “turned up” after several years, implying that stocks are now inexpensive versus cash and bonds and that the balance of risk and reward has shifted back in favour of equities.
The report notes that multiple macro indicators, which historically lead equity returns, have swung into positive territory, including a bullish steepening of the yield curve, a rise in the money multiplier, and a widening gap between nominal GDP growth and the policy rate.
The rupee is also considered undervalued on the real effective exchange rate, a setup that has often coincided with stronger forward returns from the Sensex, even though the historical relationship has weakened more recently.
On fundamentals, Morgan Stanley expects a “sharp turn” in earnings growth driven by an explicit reflation effort from the Reserve Bank of India and the government via rate cuts, CRR cuts, deregulation and liquidity infusion, as well as front-loaded capex and around Rs 1.5 trillion of GST rate cuts skewed to mass consumption.
Its proprietary earnings indicators point to improving profit growth, while the brokerage’s top-down forecasts see Sensex earnings compounding at 17% annually through FY28 in the base case, with the broad market expected to deliver even faster expansion.Positioning and sentiment are seen as additional tailwinds. Foreign portfolio investor exposure to India has weakened over the past four years, making India a potential “pain trade” if global funds rotate back into the market. At the same time, Morgan Stanley’s composite sentiment indicator, which combines flows, volatility, breadth, and momentum, has moved into the buy zone, historically a contrarian signal that has preceded phases of above-average returns.
The structural case for a valuation re-rating rests on falling oil intensity in GDP, a rising export share—especially in services—and ongoing fiscal consolidation, which together should support structurally lower real rates and reduced volatility in inflation, growth, and interest rates.
In that environment, the firm argues, India can sustain high growth with low macro volatility and lower beta, warranting a higher price-to-earnings multiple for equities and supporting a continued shift in household balance sheets towards stocks.
Against this backdrop, Morgan Stanley sets a December 2026 base‑case Sensex target of 95,000, implying about 13% upside from current levels and embedding a trailing P/E of 23.5 times, modestly above the 25‑year average of 22 times. In the bull case, assuming oil at below 60 dollars a barrel, successful reflation and easing trade tensions, the Sensex could rise to 1,07,000, while a bear case of higher oil, tighter RBI policy, and weaker global growth could see the index slip to 76,000.
Strategically, the report recommends leaning into domestic cyclicals over defensives and external-facing sectors, with overweights on financials, consumer discretionary, and industrials, and underweights on energy, materials, utilities, and healthcare. The firm remains capitalization-agnostic but flags that liquidity and sentiment conditions argue for a more selective stance, particularly in small-caps, where earlier excesses have been unwinding.