Will the Stock Market Reach 165K? A Reality Check:

March 04, 2025 (MLN): A premonition that most financial analysts seem to agree on in their recent reports. And why shouldn’t they? The correlation between stock market rallies and monetary easing is a well-known phenomenon. In both Japan and the U.S., stock markets surged significantly between 1986 and 1990, as well as from 1999 to 2000, when their respective governments adopted accommodative monetary policies.

Source: Thomson Datastream

Courtesy to: The investor’s guide to economic fundamentals, John Calverley

Our stock market responded similarly to monetary easing, rising from 66K to 117K by the end of January 2025 as the policy rate began to decline from 23% in June 2023. This impressive gain of 51K points—by all standards—came against the backdrop of a 10% reduction in the policy rate. Average rise of 5K against every 1% cut in policy rate.

This left no reason to question whether the arguments supporting the prediction were plausible enough to believe.” But what makes the prediction bizarre is analysts’ belief that a mere 1% drop in the policy rate will skyrocket the stock market from 112K to 165K, albeit with corrections along the way.

Therefore, expecting a 53K-point gain against 1% cut in the policy rate—many times more than what has been on the average during the recent rally—calls for a rationality check. Between June 2023 and January 2025, the index has risen by an average of 5K points per 1% reduction in the policy rate, making such an optimistic projection highly questionable

While policy rate cuts have always been the primary driver of index gains, the contribution from other factors to overall market performance should not be overlooked. A fair estimate suggests that these factors typically account for approximately 30% of total market gains.” Thus, even with the combined impact of a 1% policy rate cut and the 30% contribution from other factors, the index would rise by a maximum of 30K points, leaving a substantial 21K-point gap to reach 165K.

However, a policy rate of 6% or lower could shape a macroeconomic landscape capable of generating the momentum needed to bridge the 21K-point gap in the stock market. Despite the uncertainty, this possibility cannot be ruled out entirely—provided inflation remains at 2–3% for the rest of 2025 and the State Bank maintains its policy of keeping a positive real interest rate of 2–3% above inflation. Together, these factors would set the policy rate at 6% or lower.

This is the reality we are surrounded by—nominal inflation fell to 1.5% in February, thereby invalidating the SBP’s projection of 5–7% and the IMF’s estimate of 9.5% for the year. This shift paves the way for what once seemed like a distant possibility to become reality.

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