The Indian stock market could be headed for a strong year ahead as earnings growth gathers pace and both valuations and investor sentiment move away from extreme levels, according to Wall Street major Morgan Stanley.In its latest India Equity Strategy playbook, the brokerage said India appears well-positioned for a sustained upcycle, supported by improving corporate earnings, a supportive policy backdrop, strong domestic flows and a favourable long-term growth outlook.Earnings upcycle in focusMorgan Stanley said Indian corporate earnings are once again entering an upcycle. While it flagged near-term risks such as prolonged conflict in the Middle East and the possibility of a severe drought affecting the summer sowing season, it expects earnings growth acceleration to continue for several quarters.The brokerage remains constructive on capital expenditure trends across sectors such as energy, defence, semiconductors, fertilisers and data centres. It expects the investment-to-GDP ratio to rise to 37.5% over the next five years, providing a strong foundation for growth.Macro supportThe report highlighted several macroeconomic factors that could aid Indian equities. These include an undervalued currency, modest real interest rates and fiscal stability.For equity investors, Morgan Stanley sees a compelling mix of broad-based earnings growth, strong domestic equity inflows, an emerging IPO pipeline, attractive relative valuations and historically low foreign investor positioning. It also noted that India's share of global profits exceeds its weight in global indices by the highest margin seen since 2009.Growth story intactMorgan Stanley said the long-term investment case for India remains strong despite concerns around artificial intelligence and the country's continued dependence on imported oil.The brokerage acknowledged that the lack of a direct AI play remains a challenge for Indian equities and warned that AI-related disruption to IT services exports could add to those concerns. However, it believes India stands to benefit from a more multipolar global economy, with manufacturing expected to occupy a larger share of GDP in the coming decade.The report also cited India's young population and rising incomes as key structural strengths. It pointed out that India contributed 18% of global GDP growth in 2025 and expects that share to increase further in the years ahead.AI & data centre pushMorgan Stanley expects India to emerge as one of the fastest-growing markets for energy infrastructure investment, creating favourable conditions for a data centre boom.It also believes India could be a major beneficiary of AI-driven productivity gains given the country's relatively low starting point in labour productivity. According to the report, if India can lift nominal growth to 12%, the equity market could become a strong long-term compounder through the remainder of the decade.Preferred sectorsOn portfolio positioning, Morgan Stanley prefers domestic cyclicals over defensive and external-facing sectors. It is overweight on financials, consumer discretionary and industrials, while remaining underweight on energy, materials, utilities and healthcare.The brokerage also said IT services could emerge as a surprise outperformer as companies increasingly turn to the sector to build AI applications and solutions.At the same time, Morgan Stanley cautioned that India's biggest risks remain largely external, including geopolitical tensions, a slowdown in global growth, and India’s strong dependence on oil imports. Domestically, it flagged concerns around low agricultural productivity, capacity constraints in the judiciary and the potential impact of embodied AI on labour markets.In a report last month, Morgan Stanley projected the Sensex could rise to 89,000 over the next 12 months as India emerges from a six-quarter earnings slowdown and enters a stronger growth phase. The brokerage turned more constructive on Indian equities, describing the recent weakness in corporate earnings as a "mid-cycle" pause rather than a structural slowdown.Morgan Stanley's Ridham Desai has set a June 2027 target of 89,000 for the BSE Sensex, implying an upside of about 20% from current levels. The brokerage assigns a 50% probability to this base-case scenario.The target is based on the Sensex trading at a trailing price-to-earnings multiple of 23.5 times, slightly above its 25-year average of 22 times. According to Morgan Stanley, the premium valuation reflects greater confidence in India's medium-term growth outlook, the market's lower beta, a higher terminal growth rate and a stable policy environment.Under its base-case assumptions, the brokerage expects India to continue benefiting from improved macroeconomic stability, rising private sector investment and a favourable gap between real growth and real interest rates. It also factors in strong domestic economic growth, steady global growth, softer oil prices, a benign monetary policy backdrop and a balanced equity supply-demand equation.Morgan Stanley further expects retail investor participation to remain strong enough to absorb new equity issuance, while Sensex earnings are projected to compound at an annual rate of 16% through FY29.(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)