As the year 2025 comes to a close, investors are taking stock of their portfolios, and the returns have been impressive globally. The MSCI World Index has seen a return of 20.9 percent, while the tech-dominated Nasdaq has returned 22 percent, with a significant portion of these returns coming from AI-linked stocks.
The AI Boom: A Year in Review
2025 has been a year of the AI boom in the market, with nearly 75 percent of the S&P 500’s return coming from AI-linked stocks. Countries like the US, China, Taiwan, and South Korea have gained handsomely from the AI boom, while India has been left behind, with the Nifty underperforming with a return of just 9.08 percent.
Threats and Opportunities in 2026
The foremost threat to stock markets in 2026 is the potential bursting of the AI bubble, which could impact stock markets globally. The launch of OpenAI’s ChatGPT in 2022 was a transformative event, triggering an investment race among tech giants and pushing up AI stock prices.
Valuations: Not Yet in Bubble Territory
While AI stock prices are high, they are not yet in bubble territory, with traditional valuation metrics like the PE ratio indicating that they are not excessively valued. For example, Nvidia is trading at a PE of 46, while other large AI players like Microsoft, Apple, and Amazon have PE ratios ranging from 29 to 37.
Correction in AI Stocks: A High Probability Event
A recent survey indicated that 45 percent of global fund managers believe that the biggest risk to global markets in 2026 is a bubble burst in AI stocks. A correction in AI stocks is likely, but a major crash is unlikely, as big buying will emerge at lower levels.
Growth and Earnings Rebound in India
India’s GDP growth has rebounded impressively, with 8.2 percent growth in Q2 FY26. With CPI inflation climbing to 4 percent in FY27, nominal GDP growth can rise to around 11 percent, and corporate earnings have the potential to rise by 15 percent in FY27.
A correction in AI stocks and a rebound in Indian economic growth could facilitate the reversal of FII outflows and decent returns from the market in 2026. In a bull case scenario, the Nifty stands a good chance of reaching the 30,000 mark.
Remember, this is just a perspective, not a prediction. Investors should do their own research and consider their own risk tolerance before making any investment decisions.