5 reasons why Sensex, Nifty may see strong rally today; stock market outlook & more

Stock market indices Sensex and Nifty look all set to rally, at least in the initial part of Friday's session, thanks to an overnight surge in US stocks as weekly US jobless claims came in less-than-expected, easing concerns over a looming recession in the world's largest economy. The fact that the Bank of Japan Deputy Governor Shinichi Uchida downplayed the recent rate hike offered support to markets, sending yen lower against dollar. This eased concerns over unwinding of yen carry trade. Adding to the sentiment were reports suggesting Iran was reconsidering launching large-scale attack on Israel.

India’s fortress balance sheet and unhindered growth prospects, as analysts point out, makes it resilient to the current global uncertainty. Besides, there has been no major negative surprises in the ongoing results season. All these factors may help market recover today from the recent rout. 

Data overnight showed initial claims in the US for state unemployment benefits fell 17,000 to a seasonally adjusted 2,33,000 for the week ended August 3. This was the largest drop in about 11 months. Economists polled by Reuters had forecast 2,40,000 claims. Dow Jones climbed 683.04 points, or 1.76 per cent, to 39,446.49. S&P500 also surged 119.81 points, or 2.30 per cent, to 5,319.31. 

Its impact was visible across Asian markets with Hong Kong's Hang Seng climbing 1.9 per cent, Japan's Nikkei 225 jumping 1.6 per cent and South Korea's Kospi adding 1.5 per cent. Gift Nifty was trading near 24,400 level. The 50-pack Nifty settled at 24,117 on Thursday.

The next leg of the market is likely to be more balanced. The relative strength of manufacturing and small and midcap companies is partly reflected in valuations, and that will bring down the levels of outperformance, analysts said. 

"Mass consumption should make a comeback and that could drive earnings growth and upgrades across FMCG and value retail. The long-term trend will continue, but expect more sector rotation and inter-sector volatility, going forward," Emkay Global said.

This brokerage noted that India’s premium valuation against history and other markets is supported on multiple counts. The macro stability is reflected in the country risk premium collapsing by 60 bps over the last five years. 

"Growth predictability is also better – India is enjoying a golden period of sustained earnings growth. Moreover, the quality of earnings too is better, with improved return ratios and cash flows for most sectors. The broadening of India’s investor base and reduced dependence on FPIs has also pushed up valuations – we do not see that reversing soon," Emkay said.

The brokerage said it is worried about the Nifty pushing 21 times PE but it does not expect the market to become too cheap either – the LTA of 19.9 times is an attractive entry point, Emkay said.