Economic Survey warns: US market bubble could shake Indian stocks in 2025

The US stock market has soared for two consecutive years, but the Economic Survey 2025 warns that the rally may be unsustainable. With record-high corporate profits, extreme investor optimism, and stretched valuations, any correction in US markets could send shockwaves across global markets, including India.

The report underscores that the US market comprises 75% of the MSCI World Index, making it a dominant force in global finance. A downturn could impact capital flows, trigger volatility, and influence investor sentiment worldwide.

Despite geopolitical tensions, the S&P 500 gained 24% in 2023 and is on track for another 20%+ return in 2024. However, much of this surge has been driven by a handful of mega-cap tech giants—Apple, Microsoft, Amazon, Alphabet, and Nvidia—raising concerns about market concentration.

Adding to caution, the Shiller CAPE ratio, a widely used valuation metric, has hit its third-highest level in history, signaling potential overvaluation. Meanwhile, rate cut expectations have weakened, with the US Federal Reserve now forecasting a 50bps cut in 2025, down from an earlier projection of 100bps.

The Economic Survey highlights a record surge in Indian retail investors, with unique investors on the National Stock Exchange (NSE) surpassing 10.9 crore as of December 2024, tripling in just four years.

Retail investors have injected ₹4.4 lakh crore into Indian equities over the past five years, with ₹1.5 lakh crore in net inflows recorded in 2024 alone. This surge has helped offset Foreign Portfolio Investor (FPI) outflows, strengthening domestic market resilience.

Despite rising domestic participation, historical trends suggest Indian markets remain sensitive to US market movements. Since 2000, in 22 instances where the S&P 500 fell over 10%, the Nifty 50 declined in all but one case, averaging a 10.7% drop.

Research also shows that S&P 500 returns act as a leading indicator for the Nifty 50, particularly during periods of crisis. If the US market corrects sharply in 2025, the Economic Survey warns that India’s retail-driven bull run could face its first major test.

With many new retail investors having entered post-pandemic and never witnessed a prolonged market downturn, the impact on sentiment and spending could be far-reaching.

While India’s equity markets have shown increased resilience, the risk of a US-led market correction remains a looming threat. The Economic Survey 2025 urges vigilance, highlighting that elevated valuations and heightened optimism make both US and Indian markets vulnerable to external shocks.