Explained: 3 reasons why Sensex, Nifty failed to sustain relief rally

The benchmark indices, Sensex and Nifty, surged over 1% in early trade, with the Sensex climbing more than 1,000 points intraday. However, by the end of the session, most of these gains were erased.

In Short

• Profit booking and weak Q2 earnings hurt momentum
• Global factors like strong US dollar impact markets
• Recovery depends on stabilising key economic factors

The Indian stock markets began Tuesday with optimism, offering some relief to investors after a seven-day losing streak. The benchmark indices, Sensex and Nifty, surged over 1% in early trade, with the Sensex climbing more than 1,000 points intraday. However, by the end of the session, most of these gains were erased.

The Sensex closed 239.37 points higher at 77,578.38, while the Nifty50 ended at 23,518.50, showing only marginal improvement despite the strong start. The volatility reflected ongoing investor caution amid weak earnings reports, persistent foreign outflows, and broader economic concerns.

Here are the key reasons why the market rally could not sustain:

PROFIT BOOKING AND WEAK Q2 EARNINGS

Market analysts said that Tuesday's rally was driven by short-term buying, but the momentum fizzled out as investors chose to book profits. Vinod Nair, Head of Research at Geojit Financial Services, explained that the relief rally was short-lived due to consistent foreign institutional investor (FII) selling and disappointing Q2 earnings results.

Nair stated, "The recent correction in valuations might pause further declines, but a sustained recovery depends on earnings improvement, which could pick up with central and state expenditure in the second half of the year."

Gaurav Garg of Lemonn Markets Desk added that the downturn is tied to worsening fundamentals. Despite the correction, Nifty's price-to-earnings ratio remains at 20.5x, which is still above its 10-year average. Garg commented, "Valuations have moderated from high levels, but the downward trend in earnings estimates means a sustainable rebound is unlikely in the near term."

GLOBAL HEADWINDS

Global factors continue to weigh on Indian markets, including a stronger US dollar and rising US Treasury yields. These conditions have been exacerbated by relentless foreign outflows.

FIIs have sold stocks for 35 consecutive sessions, pulling out Rs 27,600 crore in the first half of November. This comes after record outflows of Rs 1.14 lakh crore in October.

Additionally, concerns about inflation and delayed interest rate cuts are further pressuring the markets. Garg explained, "The latest inflation data has heightened fears of a growth slowdown and pushed expectations for RBI rate cuts into early FY26."

The ongoing economic challenges in global markets, especially in the US and Europe, have created a "double whammy" effect for Indian equities, he added.

TECHNICAL AND SECTORAL PRESSURE

From a technical perspective, the markets remain weak. While Tuesday’s gains were driven by strength in banking and IT stocks, a sharp sell-off in sectors like metals and energy erased most of the early gains.

Ajit Mishra, SVP of Research at Religare Broking, highlighted that the market remains under the control of bears, with each rebound being used as an opportunity to sell. He stated, "The Nifty’s movement reflects bearish sentiment. We maintain our 'sell on rise' stance until there is a clear reversal signal."

Broader indices, including mid-cap and small-cap stocks, performed slightly better, posting gains of nearly 0.5%. However, the overall market sentiment remains subdued.

WHEN WILL THE MARKET RECOVER?

The ongoing correction in the Indian stock markets is unlikely to end soon unless key factors improve. Experts believe that factors such as foreign outflows, weak earnings, and inflation worries must stabilise before a sustainable recovery can occur.

Garg explained, "This is a classic de-rating in valuation multiples as markets adjust earnings growth expectations. Until there is clarity on rate cuts, earnings stabilisation, and a halt in foreign selling, the market is likely to remain rangebound with a downward bias."

Vishnu Kant Upadhyay of Master Capital Services added, "From a technical perspective, today’s short-covering rally is fragile. Unless the Nifty decisively moves above 24,000, market sentiment will remain cautious."

"Stocks with strong earnings reports remain in focus. After analysing the market, I advise market participants to adopt a 'sell on rise' strategy, while short-term investors should keep their portfolios hedged," said VLA Ambala, Co-Founder, Stock Market Today (SMT).

(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)