Sensex zooms to 4,000 points in the Diwali month: Is this the start of a new bull run?

After three brutal months of foreign exodus, Dalal Street is coming back to life. The Sensex has risen 4,159 points, a blistering 5% gain, in October alone, powered by a dramatic turnaround by foreign institutional investors (FIIs) who have pumped more than Rs 7,300 crore back into Indian equities. The benchmark index is now tantalizingly close to its all-time high, just 1,552 points away from the peak of 85,978, while the Nifty is off its all-time high by just 410 points.

The turnaround is nothing short of spectacular. Five consecutive sessions of gains have market veterans wondering whether this Diwali rally marks the start of a new bull cycle or just a celebratory flash in the pan.

“We have probably seen the peak of pessimism and negative sentiments for India,” explains Dr. Vikas Gupta, CEO and Chief Investment Strategist at OmniScience Capital, who expects Samvat 2082 to “show fireworks beyond expectations as global wars begin to subside, global and Indian interest rates fall and trade wars reach resolution.”

However, the rally remains largely concentrated in frontline stocks and institutional favorites, with Nifty Bank rising over 6% this month, while midcap and smallcap indices recorded modest gains of 3-4%, indicating that the broader market is still catching its breath.

Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, points out the crucial metric: “The one significant factor is the sharp decline in India’s earnings growth to 5% in FY 25, compared to the average 24% in the previous three years.” But he sees a turnaround in sight: sales of cars and white goods have “skyrocketed early this festive season”, allowing earnings growth to rise to 8-10% in FY26 and accelerate to 15% in FY27.

“Since ‘in the long run the market is a slave to earnings’, the key trend going forward will depend on how earnings growth evolves,” warns Vijayakumar, tempering enthusiasm with reality. Vinit Bolinjkar, head of research at Ventura Securities, is targeting 27,600 for the Nifty and 90,100 for the Sensex this Samvat, implying a substantial upside from current levels. The weak FY25 earnings trend now appears to have bottomed out, indicating a more constructive setup for Samvat 2082, he says. He cites a rebound in domestic consumption-driven Q3 2026 earnings, a potential US-India trade deal, and continued fiscal and monetary support – including interest rate cuts and higher government investment – ​​as key drivers. The Nifty is currently trading at a CY26 price-to-earnings ratio of 18x, only marginally above its long-term average of 17x, suggesting that “the potential for further downside pressure is limited.”

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The FII reversal

After selling shares worth over Rs 76,600 crore in the last three months, foreign investors have become net buyers in October, with inflows of Rs 7,300 crore.

FII’s underweight stance in India is currently the highest since 2009. “With earnings recovery in sight, the same underweight stance could allow them to close the gap. Increasing risk reward is in India’s favor, and FIIs are expected to bounce back soon,” said Alok Agarwal, head of quant and fund manager at Alchemy Capital Management.

The recent FII turnaround can be directly linked to the stabilization observed in earnings trends. Over the past month, nifty earnings per share cuts have held steady, up marginally by 1%, as analysts suggest earnings numbers may have bottomed out. A recovery is expected in the second half of FY26, driven by a recovery in consumption.

“We expect positive momentum in the broader markets to continue over the medium term. A key positive is that consensus estimates have stabilized over the past month, although the real test will come in the ongoing Q2 2026 earnings season. Smart valuations have moderated to near long-term averages, although broader, granular numbers still point to high price-to-earnings ratios,” says Seshadri Sen, head of research and strategist at Emkay Global Financial Services.

OmniScience Capital’s Gupta remains overweight banks, energy, EPC, infrastructure and housing finance, sectors that trade at discounts to their intrinsic values. He expects defense and railways to continue to receive large government subsidies, along with export incentives to further boost the Indian economy in Samvat 2082.

Emkay’s Sen favors discretionary stocks as his top overweight while remaining underweight on financials and staples amid growth concerns.

As Diwali lights illuminate the trading floors in Mumbai, the bulls are betting that this is not just a festive euphoria, but the start of something bigger. Whether that bet pays off depends on one question: Can Indian companies finally turn a profit after a year of disappointment?