Have you ever watched an OTT series where Season 4 felt like a completely different story from Season 1, which you loved? From time to time, the stock markets have the habit of rolling out Season 4 and delivering an unpleasant jolt to investors.
The year 2025 proved to be one such, where the stock market’s mood shifted from sunny optimism to hard realism, and its favourite sectors and styles dramatically shifted. We take a deeper dive into the stock market trends for 2025 to gauge what they signal for the future.
Large-caps take the crown
Like the boy who cried wolf, some folks have been warning about a crash in mid-cap and small-cap stocks since 2022. The wolf finally arrived in 2025. Between January and March, the Nifty50 fell 12 per cent, Nifty Midcap 150 plummeted 20 per cent and Nifty Smallcap 250 plunged 26 per cent, as India was hit by the US tariff shocker.
All three indices then recovered but at different speeds. As we write this on December 16, the Nifty50 had recouped all its losses and made a gain of about 9.4 per cent for 2025. The Nifty Midcap150 had a 3.9 per cent gain to show for the year. The Nifty Smallcap 250 was underwater with an 8 per cent loss.
The 2025 performance of these indices was a mirror image of what they did in the previous five years. In the five years to 2024, the small-cap index had notched up a CAGR of over 30 per cent and Nifty Midcap 150 sported a 28 per cent CAGR. The Nifty50 managed only half the returns of the small-cap index at 15.5 per cent (See Table 1).
The popular view is that large-caps should do better than mid- and small-caps from now, because they’re less expensive. What matters more is whether there’s a match between valuations and earnings growth. With a 5.8 per cent growth in their earnings between January and December, Nifty50 companies need to really kick up their earnings in 2026 to justify the index PE of over 22 times. Nifty Smallcap250 companies delivered earnings growth of over 11 per cent in 2025, but this is out of sync with the index PE of 28.6. (See Table 1).
One market-cap segment where earnings growth kept up with pricey valuations in 2025, was mid-caps. Nifty Midcap 150 constituents belted out earnings growth of 35 per cent in 2025 against the index PE of 33. Whether this growth sustains in 2026 remains to be seen. Overall, still-pricey PEs at the index level suggest that investors would be better off looking for opportunities in individual stocks in 2026, rather than expecting big gains from the market as a whole.
Markets turn choosy
In the late stages of the bull market, markets didn’t pay too much attention to fundamentals and cheerily went with fanciful ideas and themes. But 2025 saw the market shed this sunny optimism and dunk its head in cold water. Companies enjoying rich multiples were subjected to a hard reality check on earnings and roughed up if they failed the grade.
This led to huge return divergence between stocks, which headline index returns really don’t capture. While the BSE 500 managed a 4.4 per cent gain in 2025, 165 stocks in it tanked over 20 per cent, 68 stocks lost at least 33 per cent and 14 stocks nosedived more than 50 per cent. Many of the loser stocks enjoyed high multiples in good times but were ruthlessly derated as earnings failed to measure up.
For instance, Tejas Networks saw its PE derate from over 120 to 50 over the years, as its revenues shrank on interrupted order flows. Trent suffered a 41 per cent plunge in its stock price with its PE chopped down from 190 to 90, as markets found its 19 per cent profit growth underwhelming. CDMO favourite Cohance Life Sciences saw its PE whittled down from 100 to 45, as its margins slipped.
Markets also lost patience with new-age stocks and IPO debutants. Vedant Fashions (down 56 per cent), Ola Electric (down 63 per cent) and Brainbees Solutions (down 51 per cent) were taken to the cleaners after worsening profitability or widening losses. In some cases such as Whirlpool, stake-sales by the promoter triggered a massive PE derating (from over 80 times to under 40). The sheer diversity of sectors from which the top losers of 2025 hailed, tells its own story on how the market shed its sector preferences to focus on results (See Chart 1).
Low index returns hide some big gainers too. As many as 81 of the BSE 500 stocks managed a 20 per cent plus gain in this torrid year, while 100 stocks made 15 per cent. A couple of sectors dominated the gainers list – NBFCs and automobiles. NBFCs, which were beaten down earlier, enjoyed a rerating as the RBI unwound regulations that stalled credit growth and their access to funding. Moderately valued auto stocks revved up on GST and rate cuts.
Sector and style reshuffle
When a bull cycle ends in a correction, the market usually wipes its slate clean. Sectors and themes that led the previous bull run are relegated to the back bench. The hunt begins for a new set of front-benchers. Indian markets saw such a reshuffle in 2025.
Stocks from sectors such as realty, IT, pharma and consumer durables, which managed a 22-29 per cent CAGR between 2019 and 2024, lost money in 2025. Earlier slow movers such as banking, oil and gas and FMCG picked up (See Chart 2). Yes, there were sectors such as metals and auto that topped the return charts despite faring very well in the earlier bull run. Here, new triggers to earnings (commodity price rebound, GST cuts) have fuelled gains.
Investing cues: Between 2019 and 2024, ‘buy what is rising’ was a good investment style to follow. Funds following styles such as momentum and alpha delivered 25-30 per cent CAGR over this five-year period. Momentum style managers load their portfolios with stocks that have outperformed in the last 6-12 months, while alpha folks buy outperformers within this pack. As markets changed their mind in 2025, momentum and alpha portfolios saw the rug being pulled from under them (See Chart 3).
Old-fashioned styles such as quality (picking stocks based on metrics such as Return on Capital Employed and zero debt) and low volatility (picking stocks for low standard deviation) made a comeback. The value style, however, remained kingpin, managing a 13 per cent return in 2025 on top of a 31 per cent CAGR between end-2019 and 2024. This goes to show that paying heed to valuations never goes out of fashion.
Local liquidity vs foreign flows
Earnings growth apart, the only other factor that drives stock returns is liquidity. In 2025, foreign portfolio investors (FPIs) developed an intense dislike for Indian equities and engaged in a selling orgy, making net sales of around ₹1.5 lakh crore and selling in eight of the 12 months of the year. Indian retail investors also cut back on their secondary market purchases and were busy punting on IPOs.
What kept stock markets afloat, is domestic institutional flows which went from a trickle to a flood this year. DII flows into secondary markets shot up from ₹5.3 lakh crore in 2024 to over ₹7 lakh crore in 2025. Mutual fund SIP (systematic investment plan) flows accounted for about ₹2.25 lakh crore of this, while investments routed via portfolio management schemes and alternative investment funds, lumpsum MF investments, insurance and pension fund purchases made up the rest.
With DII buys at over 4 times the FPI sale volumes, the local liquidity gusher put a firm floor to market corrections whenever the FPIs went into a selling frenzy. But it must be noted that DII flows didn’t manage to take the markets materially higher in 2025. (See Table 2).
For the markets to climb higher from here, one of two things needs to happen. FPIs need to return to big buying or DIIs need to find even more money to deploy into equities. The latter looks unlikely. In fact, we should be happy if domestic retail investors retain their newfound faith in equities despite low returns.
The outlook for FPIs to return to India looks hazy at this juncture. Much like a school topper suddenly flunking, the Indian stock market went from being a top-performing global market between 2020 and 2024, to a laggard in 2025. As of November 30, 2025, the MSCI India Index (with an 8.1 per cent gain) had managed less than half the returns of the MSCI World Index (18.6 per cent). In 2025, every other major market fared well — whether it was the US S&P 500 (16.5 per cent), Hang Seng (29 per cent), Nikkei (26 per cent) or FTSE 100 (19 per cent). Rupee weakness further dims the Indian market’s appeal.
However, there are glimmers of hope. India’s GDP growth has surprised at 8 per cent plus for the past two quarters despite Trump tantrums impacting exports. Earnings growth for India Inc showed signs of recovery in Q2 FY26. But the pattern of FPI flows in 2025 clearly shows that global investors are in the grip of AI mania. They have been willing to bet only on countries and companies that have a starring role in the AI drama.
For these flows to get diverted to India, the AI story will need to develop cracks with Nasdaq 100 and other AI-linked markets like Taiwan and China correcting. Market actions in the last few months suggest that FPIs may be looking at India (which has hardly any credible AI bets) as an anti-AI trade.
As things stand, what will happen to the AI trade is tough to call. Therefore, Indian investors need to pray that the purple patch on GDP growth and corporate earnings will continue, so that valuations eventually get cheap enough to attract global investors. A détente on Trump tariffs could provide the Prozac shot that the market needs.
The author is a Contributing Editor
Published on December 20, 2025