Goldman Sachs: Indian Stocks Remain Weak in Short Term, Maintain 'Marketweight'

Overview

This week, the Indian stock market rebounded supported by falling oil prices, with the NIFTY Index rising 2% week-over-week, but performance remained inferior compared to other Asia-Pacific regions (especially North Asia markets driven by AI). Although Foreign Institutional Investors (FII) resumed net buying after 8 consecutive weeks of net outflows, the scale of inflows was limited. Based on marginal improvement in the macro environment and resilience in Q1 performance, Goldman Sachs slightly raised its earnings growth forecast for the Indian stock market in 2026, but noted that a broad trend of earnings-per-share (EPS) reductions continues, and current high valuations restrict substantial capital inflows. Therefore, Goldman Sachs maintains its 'Marketweight' rating for Indian equities and recommends investors focus on defensive sectors.

Core views

Market Performance and Capital Flows: Although cooling Brent crude prices drove the Indian stock market up 2-3% this week, performance still lagged behind the MSCI Asia Pacific ex Japan Index (MXAPJ, +4%) and MSCI Emerging Markets Index. In terms of capital flows, FII turned to a net purchase of $500 million this week after 8 consecutive weeks of net outflows, with year-to-date cumulative net outflows totaling $30 billion; in comparison, Domestic Institutional Investors (DII) bought $900 million this week. Notably, the North Asia market (South Korea, Taiwan) attracted more foreign capital than India, reflecting global capital's preference for AI-related themes. Earnings Forecast Adjustments: Goldman Sachs raised the 2026 MSCI India earnings growth forecast by 2 percentage points to 10%. This adjustment was mainly based on economists' revisions to macro prospects (such as removal of oil price assumptions, strong Q1 growth) and commodity strategists' views. However, the report emphasizes that the EPS downward revision cycle for the Indian stock market continues; despite falling oil prices, profit trends of Indian companies are weaker than most Asia-Pacific markets. Goldman Sachs expects market consensus 13% growth rate to gradually converge towards its 10% expectation. Valuation and Allocation Recommendations: Currently, the forward P/E of MSCI India is approximately 20.5x, with a premium of about 60% versus MXAPJ. While stable Rupee and lower oil prices marginally improved foreign investor sentiment, given weak profit prospects compared to other regional markets, global capital is unlikely to return in large volumes. Additionally, valuations face pressure from a potential interest rate hike cycle. Therefore, Goldman Sachs maintains its 'Marketweight' stance on Indian equities within Emerging Markets and Asian stock allocations, and prefers defensive sectors over cyclical sectors (such as Energy, Chemicals, Industrials, etc.) in style.

Analysis framework

Goldman Sachs' analysis logic follows the framework of 'Macro Driven → Profit Revision → Capital Flows → Valuation Comparison'. First, by observing macro environmental marginal impacts such as oil price changes and US-Iran agreement geopolitical factors, evaluate the extent of relief on import costs and inflation pressure for India. Second, combine unexpectedly strong Q1 performance and macro assumption changes to adjust earnings growth forecasts bottom-up, while using 'Earnings Revision Leading Indicator (ERLI)' to judge the direction of the earnings cycle for future months. Third, track FII and DII capital flow data, especially horizontal comparison with North Asia markets, to judge shifts in global capital preferences. Finally, compare Indian stock market valuation levels (P/E) against Asia-Pacific benchmarks, combine with relative strengths of profit prospects, and derive allocation recommendations. This methodology emphasizes the combination of relative value analysis and capital flow momentum.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Mechanism of Oil Price Impact on Indian Stock Market

  India is a net importer of oil; falling oil prices are generally viewed as positive because they reduce imported inflation and corporate costs, improving the trade deficit. The research report re-evaluates the positive impact of this supply-side cost change on macro and profits by removing previous oil price premium assumptions.

• Valuation MethodPE/PEG valuation

  Cross-Market Valuation Premium Comparison

  The report judges the relative expensiveness of the Indian stock market by comparing the forward P/E premium between MSCI India and MSCI Asia Pacific ex Japan Index (MXAPJ) (approx. 60%). This horizontal comparison helps identify whether capital is willing to pay an excessive premium for India's high growth in global allocation.

• Event Gaming and Behavioral FinanceExpectation Gap/Expectation Management

  Earnings Revision Leading Indicator (ERLI)

  Goldman Sachs uses its proprietary ERLI indicator to predict future earnings cycles. By analyzing the direction and magnitude of analyst earnings forecast adjustments, it captures the expectation gap between market consensus and actual results in advance, thereby judging the persistence of earnings downturn or upturn cycles.

Key data

• NIFTY Weekly Gain+2%Concurrent MXAPJ gain was +4%
• FII Weekly Net Inflow$500 millionEnded 8 consecutive weeks of net outflows, but YTD still net outflow $30 billion
• 2026 Earnings Growth Forecast10%Goldman Sachs raised by 2 percentage points; Market consensus is 13%
• MSCI India Forward P/E20.5xApprox. 60% premium vs MXAPJ
• NIFTY Target Points26,500 pointsExpected to reach by June 2027
• Domestic Equity Fund May Inflow$2.4 billion/monthDown 40% MoM, significant slowdown recently

Impact & implications

For investors, the relative weakness of the Indian stock market may persist in the short term. Although falling oil prices and stable Rupee provide marginal support, high valuations and weak profit prospects constitute major resistance. Capital tends to flow towards North Asia markets with stronger profit growth and more attractive valuations. For investors allocating to Indian assets, it is recommended to shift from cyclical sectors to defensive sectors to cope with potential earnings downgrades and volatility. In the long run, although Indian macro prospects have improved, clarity on the earnings cycle turning bottom-up is still needed.

Risks

• Global capital回流 speed falls short of expectations, leading to weakening liquidity support
• Magnitude of earnings downgrades exceeds expectations, further suppressing stock prices
• Potential interest rate hike cycle starts, putting pressure on high-valuation stocks
• Geopolitical risks resurface, causing oil prices to surge again

What to watch

• Subsequent quarterly corporate earnings reports and annual guidance adjustments
• Continuity of FII capital flows and their traffic comparison with North Asia markets
• Direction of Indian central bank monetary policy and changes in inflation data
• Relative impact of global AI theme investment热度 on North Asia and Indian tech stocks