Equities back in focus: Is a 60:40 allocation the right move in current markets?

A calibrated equity tilt is back on the table for investors. SBI Mutual Fund’s latest asset allocation outlook recommends a 60:40 allocation between equities and fixed income, signalling a balanced but positive stance on equities as valuations and sentiment moderate from recent highs.

The shift comes after markets cooled from the elevated levels seen in the second half of 2024. While the correction has improved entry points, the report stops short of calling this a deep-value opportunity. Instead, it frames the current environment as one of measured optimism, where disciplined allocation matters more than aggressive positioning.

“Our framework suggests a 60:40 allocation between Indian equities and fixed income. It projects early teens equity CAGR returns at the large cap index level over a three-year timeframe,” the report said.

Return expectations

The outlook signals a transition from the high-return phase seen post-Covid to a more normalized cycle. Large-cap equities are expected to deliver early-teen CAGR over the next three years, indicating steady but not outsized gains.

Valuation indicators support this view. Metrics such as earnings yield spreads show that equities are now close to long-term averages, compared to stretched levels seen in 2024. This places the market in a neutral zone—neither overheated nor deeply undervalued—suggesting limited scope for sharp rerating but reasonable return visibility.

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Sentiment turns supportive

A key driver of the positive stance is improving sentiment dynamics. The report highlights that investor interest—captured through internet search trends related to stock markets—has dropped close to historical lows.

“Our Internet Sentiment measure, which captures google searches for stock market related phrases, has plunged closer to historical lows. Waning investor interest is a contrarian positive in our Equity Sentiment framework,” it noted.

From a contrarian perspective, such phases of low participation have historically aligned with better forward returns. However, sentiment is not yet at extreme pessimism levels, which typically signal high-conviction buying opportunities. This reinforces a balanced rather than aggressive equity allocation.

Large caps regain prominence

The report also flags a potential leadership shift within equities. With market polarisation at historically low levels, large-cap stocks are expected to outperform broader markets going forward.

This marks a potential reversal from the previous cycle, where mid- and small-cap stocks dominated returns. For investors, this implies rebalancing portfolios toward more stable, large-cap exposure while maintaining diversification.

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Fixed income

Despite the equity tilt, the recommended 40% allocation to fixed income highlights the continued importance of diversification. In a moderate return environment, fixed income plays a critical role in managing downside risks and portfolio volatility.

The broader message for investors is clear: rely on structured asset allocation rather than short-term market timing. The framework—built on valuations, sentiment, and earnings—suggests that while tactical opportunities may emerge, long-term returns are anchored by fundamentals.

In sum, the latest signal points to a balanced, equity-favouring strategy, with a tilt toward large caps and steady expectations. For investors, staying diversified and aligned with long-term goals remains the most effective approach in the current market cycle.