Earnings recovery critical for market rerating

Markets have entered the second half (H2) of calendar year 2025 (CY25) near record highs. Sailesh Raj Bhan, chief investment officer for equity investments at Nippon India Mutual Fund, tells Puneet Wadhwa in an email interview that the sticky nature of systematic investment plans (SIPs), high liquidity, and the recent revival in market sentiment—along with improved earnings expectations—are likely to support domestic flows even in H2CY25. Edited excerpts:

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What are the top risks that investors should be aware of in H2CY25?

Given the large geopolitical developments, global growth rates may face challenges—a key risk. Earnings growth recovery over the next three to four quarters will also be critical, especially for Indian mid and smallcap stocks. A large supply of low-quality paper could emerge as a risk if investors face poor outcomes.

Are valuations a worry at current levels?

Equity markets have spent nearly nine months consolidating since June 2024. The recent pullback has been driven by a sharp drop in interest rates, liquidity support, and lower oil prices—all of which have improved expectations for an earnings recovery in the coming quarters. Earnings in the January-March quarter of 2024-25 were ahead of modest expectations but fell short of the long-term trend. A recovery in earnings of over 12-15 per cent will be critical for any market rerating.

Your view on mid and smallcaps?