Indian Market Set To Outperform The U.S. Stocks In 2024, Suggests This Indicator

The absolute gap between the Dow Jones Industrial Average and S&P BSE Sensex follows a cyclical pattern. And going by historical average, this difference has not reached its peak and could widen over the next year.

The average gap over a 50-day period rises and falls, eventually reverting to the one-year average. At present, the gap sits 5.9% above its one-year average compared to a peak of over 68.9%.

In the second half of 2023, the two indices have performed in sync. The DJIA has grown by 8.2% since July 1, while Sensex is up 8.1%.

In the last eight periods when the two indices were out of sync, the gap widened because of the Sensex outperforming or underperforming Dow Jones, and not the other way round.

The most immediate factor ready to shape the market sentiment in the next year appears to be the U.S. Fed rate revision. On Dec. 13, the U.S. Federal Reserve kept the key interest rates unchanged for the third time, at a 22-year high. But its projects suggest three rate cuts in 2024.

While recessionary troubles loom over the world's largest economy, India has a 0% recession probability, according to Bloomberg. In fact, domestic markets are expected to outperform, aided by rally in the run-up to the general election and rate cuts in the U.S. That suggests the gap could widen.

As India stocks surged, valuation concerns cropped up. Sensex trades at 25.1 times its earnings, which is at a premium to DJIA's 20.7 times.

Historic values, however, may provide relative comfort. Sensex is only marginally above the 24.28 it recorded on Dec. 16, 2019, when the DJIA was 15.

The 12-month forward estimates provided by Bloomberg suggests that these valuations could even ease going ahead.

In a recent note, Morgan Stanley cited these are key triggers for Indian stocks next year:

• Markets are expected to trade higher ahead of the Lok Sabha election, given a historical trend of markets favouring continuity and a majority government as this implies limited policy shifts after polls.

• Strong earnings expectation, with margins improving due to rising capital spending and benign material pricing.

• Declining correlation with global equities, falling below historical levels.

• Inclusion in the global bond index in June, with the weight increasing by 1% till it reached double-digits in April 2025.