Indian equities: Morgan Stanley’s 4 sector bets to 2031

Why Morgan Stanley thinks an earnings cycle is forming

Morgan Stanley says India’s equity market is nearing a multi-year earnings cycle that could expand the broader market through 2031. The firm’s India equity strategist Ridham Desai argues the market can reverse its recent trailing underperformance versus global peers. His base case is 15% earnings growth for India Inc over the next five years. He also says India is entering a “defensive growth” phase, with earnings growth “turning the corner” after six consecutive quarters of a mid-cycle slowdown. The call is positioned as medium-term bullish even as sentiment and valuations are described as near extremes. Desai’s argument is that an earnings acceleration already in the pipeline is the key support for that optimism. He adds that medium-term stock market returns could improve if the earnings cycle strengthens.

What changed after six quarters of slowdown

Desai links the recent soft patch to a temporary mid-cycle slowdown and suggests the growth engine is already turning higher. In one discussion, he cites factors such as elections, erratic rains, China policy shifts and a global AI reset as part of the backdrop to the slowdown. Yet he expects earnings growth to recover after six quarters of deceleration. He also suggests that trade deals and improved China ties could lift the market outlook, alongside domestic drivers. Even after the Sensex and Nifty ended around 2% lower following the Union Budget, he maintained his bullish stance. Morgan Stanley argues the budget’s mix of cyclical support and structural reform can underpin profit growth and sustain premium valuations. The firm also expects slightly slower-than-expected fiscal consolidation to support the cyclical recovery narrative.

Four “winning sectors” Morgan Stanley highlights

Morgan Stanley identifies four sectors it sees as potential winners if compounding growth plays out.

1. Financials: Desai lists lenders, insurers, asset managers, stock exchanges, depositories, and wealth platforms as beneficiaries of India’s “financial deepening” as savings shift into financial assets. He says banks are in a “sweet spot” with pristine balance sheets. He adds that the interest rate cycle has troughed, suggesting bank margins have bottomed, while credit growth is “finally accelerating.” He also describes valuations in banks as attractive on absolute and relative measures.

2. Consumption: The firm says the focus is shifting away from mass volume toward value. It flags “premiumization” sub-sectors where consumers are trading up to higher-quality brands.

3. Industrials and tech infrastructure: Morgan Stanley points to a capital expenditure wave spanning energy, defence, fertilizers, semiconductors and data centers.

4. IT services: While the sector faces AI-led disruption, the firm treats this as cyclical. It says IT services could see a resurgence as global companies monetize software and “token” AI spending.

Capex themes: where the investment cycle is expected to land

Desai repeatedly frames industrial opportunity through a capex recovery expected over the next five years. He names five areas driving capex: energy infrastructure, fertilisers, semiconductors, data centres and defence manufacturing. In sector positioning, he also points to aerospace alongside energy, semiconductors, fertilizers and data centers as areas tied to capital spending. Morgan Stanley’s post-budget commentary highlights the government’s pivot toward manufacturing and services, calling out that the budget speech “almost begins” with semiconductors. The note flags measures under “ISM 2.0”, incentives for rare earth magnets, and support for legacy industrial clusters. The firm’s framework is that manufacturing, services, data and AI together feed directly into the earnings narrative.

Valuations and positioning: what is overweight and underweight

From a valuation standpoint, Desai says financials look the most attractive, after a difficult period, with improving growth, likely stable margins and low credit costs. From a growth standpoint, he says consumer discretionary looks strongest, citing areas such as autos, real estate, retail, travel, healthcare and education. He calls industrials the strongest growth outlook because of the capex cycle, while noting valuations there are already rich. In his portfolio stance, he favours domestic cyclicals over defensives and external-facing sectors. Morgan Stanley is overweight financials, consumer discretionary and industrials. It is underweight energy, materials, utilities and healthcare. Desai also cautions investors to be careful about valuations, even while calling financials and industrials “great opportunities” in the context of the capex recovery.

The “dark horse” call on IT services and AI

IT services appears in Morgan Stanley’s view as the contrarian opportunity within its sector framework. Desai calls the sector a potential “dark horse” as the world accelerates its pivot toward AI applications and solutions. The firm’s view is that current AI disruption is a hurdle rather than a structural impairment. It argues IT services could rebound as global corporations begin to monetize software and scale spending beyond “token” AI budgets. Desai suggests Indian IT companies could be “quiet beneficiaries” that the market is not fully pricing in yet. The implication is not that risks have disappeared, but that the cycle could turn as enterprise AI adoption becomes commercially measurable.

Equity flows, IPOs, and the limits of policy support

Desai notes that policy measures alone may not be enough to lift equity flows. He says flows will depend on relative growth, and there is only so much India can do to lift growth by itself. He suggests growth may accelerate to the “high teens,” but for foreign equity investors to return, growth elsewhere may need to decelerate. Alternatively, he points to the start of a major IPO cycle as a possible catalyst for foreign participation, because foreigners typically buy in primary issuance. In another discussion, he describes India’s IPO wave as healthy because it “recycles capital,” with early investors exiting and capital being redeployed through new funds into other businesses and capex. That mechanism, in his view, supports the next leg of the investment cycle.

Market snapshot and key numbers Morgan Stanley referenced

Indian markets, according to Desai, have already turned around from the worst period of dollar returns in over two decades. He also said 2026 could be an “exciting year” for domestic stocks. At the Hindustan Times Leadership Summit 2025, Desai said that in 2025 so far, the Nifty 50 and Sensex had risen 10% and 9%, respectively, and hit record highs. He also downplayed the impact of recent US tariffs, saying they touch only about 1.2% of India’s GDP, and suggested a trade deal is likely. Separately, he argues that after the post-budget dip, the combination of cyclical support and structural reform still underpins the earnings setup.

What to watch next: catalysts Morgan Stanley flags

Morgan Stanley’s Jitania Kandhari points to five broad themes in public equities: financialization of savings with lower credit costs, aspiration-led consumption, localization and supply chain benefits from “China +1,” digitization via India Stack, and capex revivals in real estate and industrials including defense and electrification. On near-term catalysts, the firm suggests watching for positive earnings revisions and further dovishness from the RBI. It also flags government reforms including privatization, and the long-awaited US trade deal. In the post-budget framing, Morgan Stanley also expects increased demand for equities through buybacks to help support FY2027 earnings. Desai’s core positioning remains anchored in domestic cyclicals, with IT services as the potential upside surprise if AI monetization becomes clearer.

Conclusion

Morgan Stanley’s central message is that India is approaching a stronger earnings phase, with the potential to reverse recent underperformance against global peers. Desai’s playbook focuses on financials, consumption, and industrials, while keeping IT services on the radar as a dark horse tied to AI monetization and enterprise software cycles. The next set of signals, based on the firm’s own framework, will come from earnings revisions, RBI policy direction, reform follow-through, and whether an IPO cycle and capex wave broaden participation in the market.