Morgan Stanley sees a strong outlook for Indian equities, citing an improving earnings cycle, supportive macro policies, and historically weak relative performance that could set the stage for further upside in the market.

In its latest commentary released on May 12, the global brokerage said earnings are moving past a mid-cycle slowdown and are expected to accelerate further. "With growth acceleration likely in the pipeline and valuations and sentiment at near extremes, Indian equities are poised for a strong year ahead."

The global brokerage added that the recovery in earnings is being supported by a mix of policy and structural drivers.

"Earnings growth is turning after a six-quarter mid-cycle slowdown and is likely to accelerate further, driven by reflationary policies of the RBI and the government via rate cuts, bank deregulation and liquidity infusion, strong capex trends in energy, defence, semiconductors, fertilisers and data centres among others, large tax cuts and relatively stimulating fiscal. Thus, India's hawkish macro setup post-COVID, which drove apathy towards the Indian market, has unwound. The trade deals with the US and the EU, and thawing of China relations, add to the mix. The currency is undervalued on a real effective basis and domestic equity flows are stronger than ever. The trailing 12-month relative performance is the worst in history, relative valuations are at previous troughs and foreign positioning is at multi-year lows. India’s share of global profits exceeds its global index weight by the highest margin ever ex-2009."

On market targets, Morgan Stanley said its base case for the benchmark index implies steady upside through 2027.

"MS: "Our BSE Sensex target of 89,000 implies upside potential of 15 per cent through June 2027. This level suggests that the Sensex would command a trailing P/E multiple of 23.5x, ahead of the 25-year average of 22x. The premium over the historical average reflects greater confidence in the medium-term growth cycle in India, India's lower beta, a higher terminal growth rate, and a predictable policy environment."

The brokerage outlined three scenarios for the Sensex.

"Base case (50 per cent probability) – BSE Sensex 89,000: This level assumes continuation in India's gains in macro stability, increased private investment, and a positive gap between real growth and real rates. Robust domestic growth, steady global growth, and lower oil prices from the current levels are also part of our assumptions. We assume a benign monetary policy. We do not anticipate a bunching of issuances, and the retail bid keeps its nose ahead of the supply. Sensex earnings compound at 16% annually through F2029.

Bull case (25 per cent probability) – BSE Sensex 1,00,000: In addition to the above, oil prices go below $80/bbl, resulting in better terms of trade. Reflation policies start to achieve success and result in higher growth estimates. Earnings growth compounds at 19 per cent annually over F2026-29.

Bear case (25 per cent probability) – BSE Sensex 66,000: Oil prices average over $120/barrel in the coming months, the RBI ends up tightening to protect macro stability and global growth slows meaningfully. Sensex earnings compound at 13 per cent annually over F2025-28 with perceptibly lower growth in F2027 and equity multiples de-rate to reflect poor macro conditions."