Diwali rally watch: Is Trump the last piece of the puzzle for Nifty breakout?

The missing piece might just be clicking into place. After bleeding Rs 1.4 lakh crore to foreign investor exodus and watching helplessly as the Sensex and Nifty stayed dead flat while Asian peers rocketed 30-50%, Indian stock markets are suddenly staring at their biggest breakout catalyst yet: Donald Trump wants to make a deal.

Social media exchanges between Trump and PM Narendra Modi signal an abrupt end to the tariff standoff that has been the biggest talking point for investors. With earnings expected to bottom out in the second half of 2025, GST rate cuts kicking in from September 22, and traders pricing in 92% chance of Fed rate cut on September 17, this Trump pivot, like the missing piece of a puzzle, could trigger the explosive Diwali rally bulls have been desperately waiting for.

The rapprochement between Trump and Modi comes at a critical juncture when all other pieces of the rally puzzle appear to be falling into place.


"Trump is a dealmaker, he is not going to break a deal, but he has own way of doing things," says Sandeep Tandon, CIO at Quant Mutual Fund. "Now given the background the Indian macro is slightly improving with the GST and some of the tax initiatives which the government has taken, it will definitely boost the sentiment and overall volume."

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The numbers tell a stark story of missed opportunities. While the Hang Seng and Kospi delivered blistering returns of 51% and 31% respectively over the past year, the Nifty remained stubbornly flat—a massive underperformance that has left bulls desperate for catalysts. The culprit? A sustained Rs 1.4 lakh crore selloff by foreign institutional investors spooked by high Indian valuations and Trump's tariff threats.

But market veterans see the tide turning. "BFSI and IT sector together account for more than 40% weight in Nifty. Due to positive commentary on trade deals with India, short squeeze in both these sectors can take Nifty higher," explains Sunny Agrawal, Head of Fundamental Research at SBI Securities.

The timing couldn't be more perfect for a festive season breakout. India Inc's earnings are widely expected to bottom out in the second half, while GST rate cuts taking effect from September 22 are set to boost consumer demand during the crucial Diwali shopping season. Add to this the Federal Reserve's anticipated rate cuts and the stage is set for what could be a spectacular rally.

"If an acceptable trade deal is in place then investors can look forward to healthy returns over the next 2-3 months led by short covering and FOMO led buying by domestic retail and institutional investors," Agrawal notes, painting a picture of pent-up demand ready to explode.

Technical analysts are equally bullish. Rohit Srivastava, Founder of Strike Money Analytics & Indiacharts, believes "going past 25,600, 25,700 should not be a big deal," calling this the beginning of a "year-end rally" where any pullbacks should be viewed as buying opportunities.

Sanjay H Parekh from Sohum Asset Managers takes a longer view, projecting the Nifty could touch 26,000 levels as earnings visibility improves, with potential to reach 29,000 if earnings growth sustains. "Structurally, things are quite positive. Balance sheets are in good shape," he notes, despite acknowledging near-term growth weakness.

The sectoral impact could be immediate and broad-based. "All the export-oriented sectors whether it is pharma, IT, auto ancillaries, these are the first sectors of companies that would benefit," says Chakri Lokapriya, CIO-Equities at LGT Wealth. "The overall environment with the positive US talks plus GST cuts will lead to overall earnings upgrades."

With extraordinary short positions built up and even bullish sentiment getting capitulated, as Tandon observes, the market appears primed for a violent move higher.

A clarity on trade deal with the US will take away the overhang on India's growth prospects and is likely to revive capex in the private sector. This coupled with very strong domestic macro can aid in earnings recovery beginning 2HFY26, analysts say.

“We believe relatively expensive valuations coupled with moderate earnings growth is keeping FIIs away from Indian equity markets. To justify the valuation, FIIs may be looking forward to mid-teen earnings growth. Troika consumption booster (Tax Relief, GST Rationalisation, Rate Cut) coupled with normalised exports can help domestic cos to report healthy earnings growth and can help improve FII inflows,” Agarwal said.

As Diwali approaches, the festival of lights may well illuminate a breakout that investors have been waiting for all year.

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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)