Indian equity markets may be headed for a strong revival in 2026, with global brokerage Morgan Stanley projecting a sharp upside for the benchmark indices. In its latest India outlook, the firm said that improving foreign investor positioning, strong domestic fund flows, and normalised valuations provide the foundation for a multi-year market rebound.

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Morgan Stanley’s Sensex Forecast Markets to Shift From Stock-Picking to Macro-Driven Trade Three Key Drivers of Near-Term Upside Structural Reset Underway in the Economy

Morgan Stanley’s Sensex Forecast

Morgan Stanley expects the BSE Sensex to climb significantly over the next two years.

Bull case: 1,07,000 by December 2026
Base case: 95,000 by December 2026

The brokerage highlighted that the base-case target implies a potential 13 percent upside from current levels.

According to the note, Indian markets may be entering their strongest phase in years, supported by macroeconomic improvements and a renewed earnings cycle. After a period of sharp underperformance in 2025, Indian equities are positioned for a broad recovery.

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Markets to Shift From Stock-Picking to Macro-Driven Trade

Morgan Stanley said India is set to “regain its mojo” in 2026, transitioning from a stock-picking-driven market to a macro-led trade. The brokerage observed that:

Foreign investor positioning is currently “the lightest in history.”
Relative valuations have normalised
Domestic fund flows remain structurally strong

This combination, it said, creates a strong base for a prolonged equity uptrend.

Three Key Drivers of Near-Term Upside

Morgan Stanley identified three pillars that support India’s near-term equity upside:

Earnings Cycle:
Earnings remain in their middle phase, offering room for sustained growth.
The brokerage expects Sensex earnings to grow 17–19% annually through FY28.
Policy Pivot:
A decisive shift toward reflation is expected to aid overall economic momentum.
Improving Terms of Trade:
Better trade dynamics are likely to support corporate earnings and investment flows.

The firm said that rising private investment, strengthened bank balance sheets and broad-based nominal GDP growth of 10–11 percent will contribute to the earnings expansion.

Structural Reset Underway in the Economy

The report also highlighted that India’s rebound is part of a longer structural reset. According to Morgan Stanley, both inflation and growth volatility have dropped meaningfully, driven by:

Fiscal consolidation
Flexible inflation targeting
Macro-stability reforms
A decline in oil intensity

This shift, it said, is helping push India into a “virtuous cycle” marked by lower volatility, lower real rates and higher equity valuations.

Rise in Domestic Equity Ownership

A key element supporting India’s long-term market trajectory is the structural rise in domestic equity participation. Morgan Stanley noted that this is being fuelled by:

Household financialisation
Policy changes enabling retirement funds to allocate to equities
A steadily increasing global index weight for India

These trends, the brokerage said, create a more reliable pool of risk capital and reduce dependence on foreign fund flows, reinforcing the case for sustained market resilience.

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