Why the Indian Stock Market is Falling

#1 Fallout of the Iran War

It's the elephant in the room.

As long the war drags on, the market sentiment will not turn bullish.

There is also the point of FII selling. While DIIs have more than compensated with their buying, the relentless selling of FIIs has been an overhang on the market.

The reason for that is also the Iran War. Money has flowed in the US which has driven the Dow Jones to an all-time high.

This has come at the expense of stocks in emerging markets like India that were sold.

The war has also clouded the scenario about interest rates. Before the war, financial markets expected inflation and interest rates to slowly decline over 2026 and 2027.

This expectation has now reversed.

Higher interest rates are negative for stock prices.

#2 Slow Earnings Recovery

The Indian stock market is poised for good returns over the long term but only if earnings growth picks up. The last few quarters have not seen a good performance from corporate India on this front.

So, investors are in wait and watch mode right now. If the war ends soon, the market will expect the next earnings season to at least signal a recovery in sales and profit growth.

However, the thinking on Dalal Steet is that a full earnings recovery will take at least a couple of quarters. Until then, there is no need to factor in high earnings growth.

This tapering down of the expectation of a fast earnings recovery has caused hesitation on the part of many investors, especially institutional investors.

When Will the Market Recover?

It's difficult to predict the timing of the recovery but we can say with confidence that a recovery is inevitable. Over the last few years, the stock market has seen many so-called 'corrections'. None have been severe enough to be considered a crash or a bear market.

This is because of the massive fund flows in to the stock market form the pockets of domestic institutional investors (DIIs).

As per a report in the Mint, in 2025, the massive inflows from DIIs, Rs 7.44 trillion (tn), completely dwarfed the FII selling of Rs 1.66 tn. This trend has continued in 2026 as well.

Thus, the markets are not in danger of a collapse as long as the DII money keeps flowing in.

And when the ongoing conflict in the Middle East comes to an end, the Indian stock market should resume its upward trajectory.

Conclusion

Equitymaster, has been in the market for over 30 years and there is one thing we know for certain:

No one can predict the future and more importantly, no one should attempt to do so. We strongly believe that time in the market is far more important than timing the market.

In the long term, the Indian stock market will go up along with the Indian economy. We have even made a Sensex 100,000 in 2027 prediction.

But that's based on earnings growth, not sentiment.

Instead of trying to anticipate or react to every small move in the market, a better thing to do would be to make a watchlist of high-quality stocks and act on them when valuations become reasonable.

Do your due diligence. Consider factors such as valuation, industry trends, corporate governance, and market risks before making any investment decisions.

What about the stocks already in your portfolio?

In this uncertain environment, if you are concerned about the stocks in your portfolio, then ask the following questions...

• Are the company's fundamentals weak?
• Has there been any recent negative changes in the company's fundamentals?
• Did the PE ratio shoot up without an improvement in the company's earnings?
• Did you make a mistake in your original analysis at the time of buying?

These are all good reasons to sell or at least reduce your holdings.

But as is the case with any stock, you must allocate sufficient time to do the necessary due diligence.

If the answers to the questions above is a clear 'NO', then you can consider holding on, especially if the valuations are not too expensive.

And if the fundamentally strong stocks on your watch become available at reasonable prices, i.e., a low valuations, then you can consider them.

The best stocks to invest in right now - as long as the fundamentals are strong - are the ones that have suffered a correction of some sort for sentimental reasons.

These reasons should be short term in nature - tariff concerns, margin pressures, a cyclical slowdown in its industry, etc.

As long at the core fundamentals of the business are fine, investments can be considered at reasonable valuations... even if the stock market is falling.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...