The Indian stock market’s resilience and increasing retail participation are notable achievements. However, the the Economic Survey 2024-25 warns that global headwinds– particularly from the United States– may present significant risks in 2025.
With the US comprising 75 per cent of the MSCI World Index, any turbulence in its equity markets could ripple through the global financial system, including India.
In 2024, the US equity markets surged for the second consecutive year, driven by robust corporate earnings and optimism among investors.
The S&P 500 index is set to record a 20 per cent annual gain, buoyed by mega-cap technology firms such as Apple, Microsoft, and Nvidia.
However, the elevated valuations of these stocks, combined with historically high CAPE ratios, signal caution.
The survey notes that sentiment-driven rallies often falter during external shocks, such as geopolitical events or economic slowdowns.
Investor confidence in the US is reportedly at an all-time high, yet history shows that sharp corrections often follow periods of extreme optimism.
The Indian equity market, which has witnessed an unprecedented surge in retail participation, is no stranger to the influence of US market trends. The unique investor base at the National Stock Exchange (NSE) has tripled in the last four years, with net inflows into equities reaching a record Rs 1.5 lakh crore in 2024.
However, this increased exposure also raises vulnerability. Historically, the Nifty 50 index has shown a strong correlation with the S&P 500, particularly during periods of significant US market corrections.
For instance, during the March 2020 sell-off, foreign portfolio investor (FPI) outflows of $8 billion triggered a 23 per cent decline in the Indian market. Even as Indian equities decouple from the US in some aspects— such as resilience to FPI outflows— the asymmetric relationship remains significant.
The survey highlights that S&P 500 returns often act as a leading indicator for the Nifty 50, underscoring the need for vigilance.
The survey identifies the elevated valuations and investor sentiment in the US as a potential trigger for a meaningful correction in 2025.
If such a correction occurs, it could cascade into Indian markets, especially given the influx of young, relatively inexperienced investors.
Many of these participants have never experienced prolonged market downturns, and a significant correction could dent sentiment and household wealth.
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Economic Survey 2024-25: Why Indian investors should watch US stock markets closely
