What's driving the rally in global, domestic markets in H1 of 2025?

Markets Roar Back in H1 2025: What’s Fueling the Rally?

The first half of 2025 has seen a robust rally in both global and domestic equity markets, defying expectations of a volatile start to the year. From Wall Street to Dalal Street, indices have posted impressive gains, with several benchmarks reaching all-time highs. The surge has left many investors wondering: what’s powering this widespread optimism?

Central Banks Turn Dovish: A Key Catalyst

One of the most significant tailwinds for equity markets in H1 2025 has been the shift in monetary policy across major economies. After years of hawkish stances, central banks including the U.S. Federal Reserve, European Central Bank (ECB), and Reserve Bank of India (RBI) have pivoted towards rate cuts or paused tightening cycles.

“The Fed’s three rate cuts in the first half of 2025 have significantly improved risk appetite. The market had priced in a soft landing, and lower rates are now supporting equity valuations,” said Mark Donovan, Chief Global Strategist at Altera Capital.

India followed suit, with the RBI cutting the repo rate by 25 basis points in June, citing easing inflation and the need to support growth amid global disinflationary pressures.

Strong Corporate Earnings Surpass Estimates

Earnings growth has surprised on the upside globally, further boosting investor confidence. In the U.S., the S&P 500 reported average EPS growth of over 9% in Q1 and Q2, driven by technology, industrials, and financials.

In India, the Nifty 50 companies delivered robust results as well. Sectors like auto, banking, capital goods, and real estate outperformed. IT majors rebounded after quarters of underperformance, aided by signs of recovery in U.S. client spending.

“We saw a broad-based beat in earnings in Q4 FY24 and Q1 FY25. Domestic demand remains strong, and margin tailwinds from lower input costs are now reflecting in profitability,” said Neha Gupta, Head of Research at Centrum Broking.

Improved Global Geopolitical Climate

The easing of geopolitical tensions, particularly in Eastern Europe and the Middle East, has contributed to a risk-on sentiment in global markets. A temporary ceasefire in the Russia-Ukraine conflict and successful negotiations around Iran’s nuclear program have led to stability in energy markets.

Brent crude prices have hovered between $75–$80 per barrel, supporting both developed and emerging market economies. Lower energy costs have helped contain inflation and bolster consumer sentiment.

FII Inflows into Emerging Markets Rise

Emerging markets, particularly India, have seen a strong resurgence of foreign institutional investments (FIIs). According to NSDL data, net FII inflows into Indian equities touched ₹1.24 lakh crore in the first six months of 2025 — the highest since H1 2021.

This influx has been driven by India’s stable macroeconomic fundamentals, improving GDP growth projections (expected to hit 7.2% in FY25), and political stability post general elections.

“India remains a structural story for global investors. The post-election clarity and reform continuity are boosting investor confidence,” noted James Li, Emerging Markets Fund Manager at Tanager Global.

Retail Participation Continues to Rise

Domestic investors have also contributed significantly to the market rally. Systematic investment plans (SIPs) have touched record highs, averaging ₹20,500 crore per month, as retail investors remain committed to equity as a long-term asset class.

The growing financial literacy, rapid digitization of investing platforms, and favorable taxation policy have made equity investing more accessible than ever.

“We’re witnessing a generational shift in the way Indian households allocate savings. Equity participation is not just cyclical anymore; it’s becoming structural,” said Ramesh Iyer, CEO at FinTree Wealth.

AI and Tech Boom Fueling Global Optimism

Globally, investor excitement around artificial intelligence (AI), clean energy, and automation has reignited a tech-led rally. U.S. giants such as Nvidia, Microsoft, and Apple have driven the Nasdaq 100 to new highs, and the ripple effects are visible in markets like South Korea, Japan, and India.

Indian tech players like Infosys, TCS, and L&T Technology Services have also benefited from increased demand in AI, automation, and cloud computing.

Investor Outlook for H2 2025

While the rally has been strong, analysts urge caution going forward. Valuations in some segments have become stretched, and the second half of the year may bring volatility due to potential global election cycles, oil supply disruptions, and delayed monsoon impacts in India.

“We expect markets to consolidate in H2, with selective opportunities in infrastructure, financials, and new-age tech. Earnings visibility will remain the key driver,” said Ritu Sharma, Equity Strategist at Axis Securities.

Nonetheless, the broader consensus remains positive, with the market expected to maintain its upward bias barring any major external shock.

The first half of 2025 has been marked by an impressive equity rally underpinned by central bank easing, resilient earnings, improving geopolitics, and robust investor participation. As global liquidity returns and risk appetite strengthens, markets have rewarded those who stayed invested. However, prudent sectoral allocation and valuation discipline will be crucial for navigating the second half of the year.

For investors, the H1 rally is not just a sign of optimism—it is a reminder that despite volatility, fundamentals continue to shape long-term market trends.