Indian Market Could See Cyclical Slowdown In 2025 But Key Sectors Offer Opportunities: Goldman Sachs

As India enters 2025, the outlook for its equity markets presents a mix of challenges and opportunities. While the country's strong long-term growth story remains intact, the near-term economic landscape is expected to face headwinds, particularly due to cyclical slowdowns in domestic growth. This slowdown has prompted a shift in market sentiment, leading to a more cautious approach toward Indian equities, Goldman Sachs has said.

The brokerage said Indian equities are anticipated to remain relatively insulated from global macroeconomic pressures such as a stronger US dollar, slower emerging market easing, and potential increases in US tariffs on China.

However, domestically, the story is more mixed. India's GDP growth is projected to decelerate to 6.3% year-on-year in 2025, a drop from previous years, driven by continued fiscal drag and slower credit growth. This deceleration is expected to weigh on corporate earnings, which already saw a reduction in expectations during 2024. As a result, Goldman's stance on Indian equities has been downgraded to 'marketweight', reflecting the balance between long-term optimism and near-term challenges.

For the next few years, earnings growth projections for MSCI India are tempered. Goldman forecasts a 12% growth in earnings for 2024, followed by 13% in 2025, and 16% in 2026—slightly below consensus estimates for the same period.

Valuations have seen some correction, with MSCI India's forward price-to-earnings ratio now trading at nearly 23 times, still well above its 10-year historical mean.

While this marks a pullback from recent highs, it suggests a potential risk of further de-rating. Historically, markets with high starting valuations and downgraded earnings expectations tend to exhibit muted near-term returns. As a result, Goldman expects Indian equities to remain range-bound in the short term, with a Nifty three-month target of 24,000 (+2%) and a 12-month target of 27,000, driven by a recovery in earnings growth over time.

Despite a tempered market outlook, there are pockets of opportunity in India, according to the brokerage. The firm maintained a tactically neutral stance on Indian equities overall, but favours select sectors that offer higher earnings visibility and are poised to benefit from domestic consumption growth. Key sectors include auto, telecommunication, insurance, real estate, and internet companies, where earnings growth remains relatively stable despite the broader economic slowdown, it said.

Goldman has also upgraded export-oriented sectors, particularly information technology and pharmaceuticals, due to expected tailwinds from a weaker Rupee and improving demand conditions globally. These sectors are seen as defensive plays amid the uncertainty in domestic growth.

The brokerage's medium-term investment themes focus on sectors that align with India’s structural growth story, including housing, agriculture, defence, tourism, and the rising affluent middle class. These sectors are expected to benefit from long-term trends such as urbanisation, increased defence spending, and a growing consumer base.