The Indian stock market is expected to regain its mojo in 2026 after delivering its worst relative performance to emerging markets (EM) in 31 years, according to analysts at Morgan Stanley. In its latest India strategy report, the global brokerage firm has set a bull-case Sensex target of 107,000 by December 2026, and a base-case target of 95,000.

Morgan Stanley Equity Strategists Ridham Desai and Nayant Parekh argue that the policy pivots and a reflation push are laying the groundwork for a strong recovery in nominal growth and corporate earnings after a mid-cycle slowdown over the past year. They noted that the relative valuations have corrected meaningfully and likely bottomed in October, while foreign portfolio investors (FPI) exposure remains the lightest in history.

At the same time, the structural domestic bid for equities remains intact, supported by rising household allocation to stocks.

The global brokerage believes India is set for a positive growth surprise, underpinned by the combined reflation effort of the RBI and the government through rate cuts, a CRR cut, bank deregulation and liquidity infusion, front-loaded capex and around ₹1.5 lakh crore of GST rate cuts tilted towards mass consumption.

"The thawing of relations with China and China's anti-involution drive add to the mix. A likely India-US trade deal should further boost sentiment. Thus, India's hawkish post-Covid macro setup is now unwinding," Morgan Stanley said in a report.

Case for re-rating

The global brokerage house argues that India has a strong case for a valuation re-rating. The falling intensity of oil in GDP and rising share of exports in GDP, especially services, and fiscal consolidation are expected to reduce the savings-investment gap and allow structurally lower real rates. At the same time, lower inflation volatility under flexible inflation targeting, should lead to lower volatility in both interest rates and growth.

High growth with lower volatility, falling real rates and a lower beta, they say, justify higher P/E multiples and support a continued shift in household balance sheets towards equity assets.

Earnings cycle to resume

Morgan Stanley believes the earnings cycle is only midway through and identifies five key drivers — an emerging private capex cycle, corporate releveraging, a robust banking system, improving terms of trade through higher participation in global trade and lower oil dependence, and a structural rise in discretionary consumption.

Sensex Target

In its base case (50% probability), Morgan Stanley has Sensex target of 95,000 by December 2026. This assumes continued macro stability via fiscal consolidation, higher private investment, a positive real growth–real rate gap, robust domestic growth, steady global conditions and benign oil prices. It also builds in a further 25 bps cut in short-term interest rates, supportive liquidity, absence of supply shocks from large issuances, and sustained retail participation. Sensex earnings are projected to compound at 17% annually through FY28.

In the bull case (30% probability), the Sensex target has been set at 1,07,000, assuming oil stays below $65 per barrel, reflation policies deliver stronger growth, and global trade tensions ease with tariff reversals. Earnings growth is expected to compound at 19% annually over FY25–28.

In the bear case (20% probability), the Sensex target is 76,000, factoring in oil above $100 per barrel, RBI tightening to safeguard macro stability, a meaningful global slowdown with a US recession, worsening India–US trade ties and de-rating of equity multiples. In this scenario, Sensex earnings are projected to grow 15% annually over FY25–28, with weaker growth in FY26.

Portfolio Strategy

Morgan Stanley prefers domestic cyclicals over defensives and external-facing sectors. It remains Overweight on Financials, Consumer Discretionary, and Industrials, while maintaining its Underweight stance on Energy, Materials, Utilities, and Healthcare.

It believes the market is transitioning into one that will be driven by macro factors, where stock-picking loses importance. "We are capitalization-agnostic," it said.

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