Nifty around 25,000: Are earnings strong enough to justify valuations?

India’s benchmark Nifty 50 index is inching closer to reclaiming the psychologically important 25,000 mark, buoyed by strong domestic liquidity, policy optimism, and improving macro indicators. After rising nearly 5 per cent in 2025 so far, the index continues to attract investor attention even amid global uncertainties. However, the question remains: Is this optimism supported by underlying earnings growth?

Macroeconomic Optimism Boosts Market Confidence

In a recent report, brokerage house InCred Equities pointed out that while high-frequency macro data shows a mixed picture for both domestic and export-oriented sectors, recent government policies have rekindled optimism for a broader economic revival. 

Factors like a stronger-than-expected monsoon, easing fuel prices, and a higher repo rate cut by the Reserve Bank of India have begun to lift consumer sentiment. The brokerage highlighted that rural demand, in particular, is likely to benefit from favourable weather and price stability, while urban consumption should see relief from easing inflation.

Earnings Momentum Slows, Valuations Stretch

According to InCred, Nifty-50 companies reported a modest 5 per cent year-on-year growth in profit after tax (PAT) for the March 2025 quarter, which fell short of the Bloomberg consensus by about 1 per cent. This lag comes in stark contrast to developed markets like the US, which saw strong earnings beats. It noted that EBITDA growth excluding BFSI stood at a healthy 20 per cent, driven largely by retail, telecom, and capital goods sectors. However, sectors like cement continued to struggle. The FY26 earnings per share (EPS) forecast for the Nifty-50 has been revised down by 2 per cent, with IT, consumer discretionary, industrials, and BFSI leading the downgrades.

Citing improving macro fundamentals—such as the potential for an above-normal monsoon and declining crude oil prices—InCred raised its bull-case probability from 25 per cent to 35 per cent. As a result, it revised its blended Nifty-50 target marginally higher to 25,142 (from 24,280 earlier) by March 2026, indicating a limited 1 per cent upside from current levels. However, the brokerage cautioned that while valuations have reverted to their 10-year average, short-term earnings downgrades and cautious management commentary remain key concerns.

It further added that with the recent rally lifting the Indian stock market's valuation, especially in the small- and mid-cap space, investors need to become more selective. The Nifty Smallcap-100 index now trades at a premium to the broader Nifty-50, raising caution over stretched valuations. 

InCred has added Camline Fine Sciences to its high-conviction list, booked profits in Adani Ports and Cipla, and initiated coverage on mid-sized banks with an Overweight rating, given their improving liquidity and cost advantage.

External Support and Risks on the Horizon

Meanwhile, brokerages such as Goldman Sachs and Jefferies have also raised their Nifty targets to the 25,000–25,500 range, citing India’s stable macro environment, manageable inflation, and growing global fund flows. Domestic investors, too, continue to support the rally with SIP inflows hitting a record ₹21,000 crore in May 2025. However, InCred warned that multiple risks remain. The upcoming US Federal Reserve policy decision on June 18 could sway global sentiment, while escalating geopolitical tensions and slow rural demand recovery could act as spoilers. Rising input costs may also hurt corporate margins, leading to possible valuation corrections if FY26 earnings disappoint.

Overall, the Nifty’s approach toward the 25,000 level appears to be driven more by optimism and liquidity than robust earnings expansion. InCred believes that while the broader macro environment provides some tailwinds, stretched valuations, muted earnings upgrades, and global headwinds temper the rally’s sustainability. For investors, the focus must now shift to bottom-up stock picking with an emphasis on quality, earnings visibility, and valuation comfort, as the market enters a more mature phase of its bull run.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.