Menu
2025: The Year in Review
The year gone by has been a tale of two distinct narratives. On one hand Artificial Intelligence (AI) boom and an easing monetary cycle has supported the stock markets. On the other rising geopolitical tension and concerns over US government debt has resulted in spectacular performance of precious metals and a depreciating US dollar. In contrast, Bonds, bitcoin and crude have been underperformers in 2025.
Indian markets have underperformed the global markets in 2025 up 5% in USD terms. India has been a case of glass half full. US tariffs, depreciating rupee, continued earning cuts and high valuations weighed on the market performance. The government has focused on reviving consumption through GST and income-tax cuts; the RBI has eased liquidity, and corporate and bank balance sheets remain healthy.
Looking ahead, the two big global debates are if and when will the AI bubble burst and how rising geopolitical tensions will affect precious metals. The near-term consensus is that global economic growth will remain around 2.5%, and an easing liquidity cycle will be supportive for stocks. For India, the key issue will be the revival of the earnings cycle to sustain valuations.
Stable macro; expect GDP to grow at 6.5% driven by revival in consumption
The macro-outlook is stable, with real GDP growth of 6.5% expected in FY27. The government is likely to continue focusing on fiscal consolidation and the current account looks benign. After the base effect adjustment, inflation is likely to be 4-4.5% range. RBI has been on an easing cycle which may be coming to a pause. The income tax and GST cuts are clearly aimed at boosting consumption.
Governments focus on fiscal consolidation, combined with states increasing giveaways to win votes, will likely put a lid on growth in government capital expenditure. Currency depreciation in 2025 has been far higher than expected. This is partly explained by the government’s desire to protect exporters from harsh US tariffs, market sentiment about those tariffs and FII flows. Overall, it seems the worst of the currency depreciation is behind us.
Resolution of a US trade deal is a major headline. India’s exports to the US total US$80 billion, or about 16% of overall exports. Services exports are not affected and on paper the pain appears manageable. However, India’s ability to grow employment over the long term depends on being part of global supply chains and a favourable US trade deal would help achieve this objective. If the trade deal does not materialise, headline growth may not suffer but sectors such as textiles and emerging export industries would be hit. On the currency front, the REER has adjusted meaningfully, with a real depreciation of about 10% from the peak, indicating undervaluation. This provides exporters with a cushion against higher tariff impacts.
In this note we have a closer look at the earnings cycle, market liquidity cycle and the valuation cycle. While our process is purely to focus on bottom-up stocks but being aware of these cycles helps us appreciate the macro risks.
Framework for market cycles – Earnings, leverage and valuations
Analysing market performance through the lens of earnings, leverage and valuations provides a simple framework for understanding market cycles. Markets have traded between 12x and 25x one-year forward earnings. When the earnings cycle is strong, as in FY03–FY08 or FY21–FY22, returns are very strong, valuations move toward the higher end and corporate leverage generally builds up as the cycle progresses. As the earnings cycle weakens, especially when corporate leverage is high, markets tend to move toward the lower end of the trading range. Between these cycles, markets typically trade in the 16–25x band while seeking direction from earnings growth. This is the backdrop for the overall market; individual stock performance can still vary depending on each company’s earning trajectory, management execution, capital allocation and valuation.
Leverage cycle – During the FY03–FY08 cycle, corporate leverage rose and ultimately peaked in FY12. For the past decade-plus, Indian corporates have been in a deleveraging cycle. Bank’s NPLs peaked in FY18. The start of the FY20 earnings cycle did not see a build-up in corporate leverage. Both corporate and bank’s balance sheets are in good health.
Where are we in the earnings cycle now – after two years of earnings downgrade, is there a reversal?
Post covid recovery, last two years have seen low earnings growth with constant downgrades in expectations. The earnings slowdown was driven by a broad fade in both top-line and margins. Revenues growth remained weak in IT service, cyclical sectors such as oil & gas and metals where the tailwinds from commodity/price cycles normalized. Margins came under pressure in parts of defensives and consumption – especially staples, building materials and pharma. NIMs pressure due to rate cut impacted bank’s earnings. Overall Nifty was up 10% in rupee terms for FY25, driven by PE expansion.
Domestic equity flows remain resilient
Domestic equity flows have been strong, but foreign investors have been net sellers. The pace of equity issuances has picked up; 25–30% of overall offerings have been sold down by promoters or private equity. Domestic flows are likely to remain strong.
Consensus expect 16% earnings growth for FY26-28
Consensus expects the earnings downgrade cycle to be over and a pickup in earnings over next two years. The earnings recovery seems broad based across sectors driven by pick-up in revenues and margins. Market is expecting boost in consumption to reflect in earnings recovery. US tariffs issues, if not resolved may continue to weigh on some of the export driven sectors.
Markets are trading toward the higher end of their historical range. Earnings growth will be the key driver of market performance from here; therefore, we expect range-bound markets driven by the earnings trajectory. Major reforms that enhance earnings could push markets higher, global events which could impact earnings may see markets moving lower as it may impact both sentiment (PE ratio) as well as earnings.
In summary, market cycles can be effectively understood through the interplay of earnings, leverage, and valuations. While valuations are currently toward the higher end of historical ranges, balance sheets across corporates and banks remain strong after a prolonged deleveraging phase. The past two years have been marked by earnings downgrades, weak revenue growth, and margin pressures across several sectors, resulting in market gains largely driven by valuation expansion rather than earnings growth.
Looking ahead, consensus expects the earnings downgrade cycle to have bottomed out, with a broad-based recovery in earnings over FY26–FY28 supported by improving consumption, revenue growth, and margin normalization. With limited scope for further valuation expansion, earnings growth will be the primary driver of market returns. As a result, markets are likely to remain range-bound and increasingly differentiated, with performance hinging on the pace and durability of the earnings recovery, the resolution of global risks, and the impact of any reforms that can structurally enhance earnings growth.
At East Lane, we do keep the macro picture at the back of our minds as we focus on bottom-up stock picking. As we have shared above, businesses will go through earnings and valuation cycles, the key is – can they scale through the cycles to create long-term value?
Our focus remains to understand the key drivers of an individual business, understand their growth potential, evaluate if the managements have the execution capabilities, ensure capital allocation is done optimally and last but not the least arrive at a fair value for such a business. If all of the above are in favor, that provides us the best opportunity to buy a stock.
Markets in the short term are driven by sentiment but in the long term by fundamentals. A re-rating or a de-rating phase in the market has a significant implication for returns. Our endeavor is to better understand fundamentals to be able to ride through the market cycles.
Wishing you and your families the very best in 2026!
East Lane Fund performance
The performance represents overall performance of PMS as per SEBI guidelines. Since we do not have a model portfolio approach, performance for individual accounts will vary.
At East Lane, we remain committed to our investment philosophy of investing in companies with a long runway ahead but would only own them when available at reasonable valuations.
If you have any questions regarding the performance of your portfolio with us or any other subject that you think we can help, please feel free to reach out to us for the same.