India's GDP Soars, But Stocks Lag: Why Profits Aren't Growing

India's economic engine is running hot, with GDP growth consistently between 7.7% and 8.6% over the past five quarters. However, this impressive economic expansion has not mirrored performance in its stock market, which has lagged behind other emerging economies. The core issue is the disparity between economic growth and corporate earnings growth.

Historical patterns show Indian equities have experienced significant leaps driven by strong earnings, such as between 2020 and mid-2024. Currently, however, single-digit earnings growth has persisted, a stark contrast to previous booms. This slowdown is attributed to margin pressures from elevated raw material and energy costs, which companies find difficult to pass on to consumers.

Despite these headwinds, certain sectors offer a more optimistic outlook. Financials are showing accelerated credit growth, and industrial and technology hardware sectors are benefiting from infrastructure buildouts and data center demand. Consensus estimates project Indian earnings to grow significantly by 2027 and 2028, potentially outpacing the rest of Asia. This suggests a possible reversal of recent trends where domestic earnings lagged the region, which could bolster Indian stocks.

However, investing in India's market still carries risk. Forward earnings estimates could be downgraded, as they have been in previous years. The ongoing Iran war and its impact on energy prices add another layer of uncertainty. While consensus estimates for 2026 and 2027 have remained stable despite price spikes, a prolonged conflict could further weaken earnings. Ultimately, India's market success hinges on translating economic momentum into sustained corporate profits.