Almost every central bank worldwide is uncertain about what will happen to the global economy. Still, stock market investors are confident that the market will deliver bountiful returns from its current level. Stock market investors who adopted a defensive strategy in the first few months of 2025 have now shifted their gear and are adopting a Risk-on strategy. Globally growth strategy did well in the last two months compared to value investing. Bitcoins, after suffering heavy hammering, are now trading at an all-time high. In India, small-cap stocks gained in double digits in May and are now almost on track to wipe out the losses of 2025. Daily cash Volumes are again above Rs 1 lac crore. Advance decline ratio third month in a row above 1, suggesting that fear is out and risk is again back on the playbook.

On the other hand, after heavy selling in the last quarter of 2024 and the first quarter of 2025, FPis have made a comeback and pumped in Rs 19860 crore in May. This is the second consecutive month of inflows.  Additionally, DII pumped in Rs 67600 crore in May. Hence, both combined pumped in Rs 87500 crores in May, the eight-month highest inflow number that was seen last time in September 2024. We are all aware of how the market behaved after September 2024.

One reason for this Risk on strategy is the TACO (Trump Always Chickens Out). The market is no longer worried about the imposition of new tariffs, assuming that at the last moment, Trump will put them on hold. Hence, 3T (Trump’s Tariff Turmoil) is no longer the factor for the market to worry about.

For India, the escalation at the border with Pakistan, followed by the ceasefire, helped the market rebound. The global cues also helped. The escalation helped defence companies to regain investors’ confidence, as a few defence companies moved up as much as 100 per cent from their 2025 lows. This is despite overall defence basket companies reporting poor March numbers, where the net profit of Nifty India defence index companies is almost at the same level as in March 2024. Their TT M price-to-earnings ratio is at 61x. Hence, there is little margin for error in these companies.

Even the March numbers for India Inc. are far from satisfactory. Overall, India reported a net profit growth of 4.31 per cent, and excluding Banks, NBFCs, and Insurance, the same number increases to 6.78 per cent. That means India Inc.’s net profit growth is lower than the nominal GDP growth rate. That makes little reason for the market to cheer the numbers. The Bloomberg consensus for June 2025 indicates that Nifty50 companies are expected to see a decline in net profit. On the other hand, TTM P/E of India Inc. is 25.9x, and excluding Banks, NBFCs, and Insurance, it rises to 31.7x. We need strong earnings to justify the rich valuations.

On the positive side, there are tailwinds, such as GST collections for two consecutive months above Rs 2 lakh crores—a record. Expectation of a good monsoon that will keep food inflation low and boost rural income, and help consumption growth. A tax rebate is another factor that will help taxpayers spend more, and as crude oil prices continue to slide, India will save a huge amount on forex, easing inflation pressure.

While we understand that the market has adopted a Risk-on strategy, we are uncertain how long this trend can continue. One can’t ignore the market fundamentals for long. We need strong earnings growth to justify the rich valuations. The market is full of anecdotes that show when a scrip moves up substantially in a short period, a sharp correction often follows. Hence, instead of chasing companies, we strongly recommend examining the business model of the companies before entering them. In this kind of market, due diligence is of paramount importance.