Indian stocks have historically been sensitive to fluctuations in the US market, with the Nifty 50 showing a strong correlation with the S&P 500. The Economic Survey 2025 suggests that a significant market correction in the US could trigger negative returns in India, highlighting the risks involved for retail investors.
BY PC Burau
The Economic Survey 2025, presented in Parliament on Friday, has raised concerns about the potential for a “meaningful market correction” in 2025, influenced by the elevated valuations and optimistic market sentiment in the United States. The survey warns that if such a correction occurs, it could have a ripple effect on India, particularly due to the increased involvement of young, relatively new retail investors in Indian stock markets.
The survey points out that many of these new investors, who entered the market after the pandemic, have not experienced a major and prolonged market correction. As a result, if a correction were to take place, its impact on investor sentiment and consumer spending could be significant.
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Regarding the correlation between Indian and US stock markets, the survey highlights that the Indian equity market has been highly sensitive to movements in the US market. The Nifty 50 index has shown a strong correlation with the S&P 500 over the years. An analysis from 2000 to 2024 shows that, during 22 instances when the S&P 500 corrected by more than 10%, the Nifty 50 posted negative returns in nearly all cases, averaging a 10.7% decline.
Conversely, in 51 instances when the Nifty 50 faced a correction of over 10%, the S&P 500 showed positive returns in 13 cases, with an average return of -5.5%. Despite the resilience shown by the Indian market, supported by growing retail participation, the risks associated with a potential US market correction remain significant, according to the survey.
In the US, the stock market has been on a strong upward trajectory, with the S&P 500 outperforming broader developed markets for the second consecutive year, driven by strong corporate earnings and economic resilience. The rally has been largely propelled by a handful of mega-cap technology companies like Apple, Microsoft, and Amazon, with the S&P 500 Top 10 Index showing a robust over 40% return year-to-date.
However, the survey notes that the recent rally in US markets has raised valuations to high levels, with the Shiller S&P 500 Cyclically Adjusted Price-Earnings (CAPE) ratio indicating caution. This, combined with tapering expectations of interest rate cuts by the US Federal Reserve, adds to the uncertainty surrounding the sustainability of US market growth.
While the US Federal Reserve has kept rates on hold at its January meeting, analysts now predict that rates will likely remain steady through 2025, further heightening the potential risks and uncertainties for both US and global markets.
