Budget, earnings to set market direction this week

Domestic equities this week will focus on the Union Budget to be announced on Tuesday, which could set the tone for the next leg of market direction. In addition, with the April-June quarter (Q1FY25) earnings gaining pace, we expect results of prominent companies to drive the stock-specific action in the market.

This apart, global cues will also shape the market, especially as new tensions emerge between the United States and China. US Core PCE data along with PMI will be key events to monitor.

Last week, the markets, despite consolidating, continued making fresh new highs with Nifty crossing 24,800 mark while Sensex surpassed the 81,000 mark. Profit booking was seen in the markets, driven by global cues and caution ahead of the Budget, which led to a shift towards heavyweights.

Nifty ended the week flat at 24,531. However, the broader markets plunged with Midcap 100 and Smallcap 100 down 2.1% and 2.3% respectively. Media and Metals were the biggest losers, down 5% each. Weak demand from China and a rising US Dollar Index largely pulled down the metal stocks.

The IT sector was the biggest gainer - up 2.3% after TCS, Infosys, HCL tech and LTI Mindtree reported better-than-expected Q1FY25 results. Retail too gained 2.3% as investors moved to defensives, and rural recovery is uplifting the demand for consumer companies.

Banking sector was up 1.4% after media reports suggested that the government may introduce amendments to the Banking Regulation Act 1949 and other laws to push sectoral reforms during the upcoming Budget session.

Despite profit booking, the overall sentiment is quite positive especially after the International Monetary Fund raised its FY25 GDP projection for India to 7% amid a boost in private consumption, especially in rural areas. On the other hand, the Asian Development Bank retained its growth forecast at 7%.

Foreign Institutional Investors have been mostly buyers throughout the month, having bought more than Rs 20,000 crore in July so far, which helped in the markets reaching new highs.

Global markets saw profit booking especially in technology and chip stocks. In addition, the Microsoft outage impacted a lot of large organizations like airlines and stock exchanges globally on Friday. Otherwise, data released during the week pointed towards higher probability of rate cut in September.

Given the uncertain global cues and ongoing earnings season, we might see more profit booking in broader markets, especially given their very high valuations. It is advisable to shift part of the portfolio towards large cap where the valuation comfort is still there.

(The writer is head of Retail Research, Motilal Oswal Financial Services Ltd)