Goldman Sachs Group Inc. strategically downgraded Indian equities to neutral from overweight as slowing economic growth dampens corporate earnings expectations.

"While we believe the structural positive case for India remains intact, economic growth is cyclically slowing in many pockets," strategists such as Sunil Koul wrote in a note on Tuesday. Worsening earnings pessimism, an increased pace of earnings-per-share cutbacks, and a slow start to the September-quarter reporting season all have an influence on profits, they said.

High valuations and a less favorable environment may limit the near-term upside for local stocks, they warned.

India's record stock surge is beginning to show symptoms of exhaustion, with the benchmark NSE Nifty 50 Index falling more than 5% in October, on course for its worst month in more than four years.

"A large 'price correction' is less likely given support from domestic flows, but markets could 'time correct' over the next three to six months," according to strategists at Goldman Sachs. They reduced their 12-month objective for the NSE Nifty 50 Index to 27,000 from 27,500 before, representing a 10% increase from Tuesday's finish.

The Nifty indicator is currently trading at 20 times its 12-month future earnings, which is higher than its five-year average of 19.4 times. According to Bloomberg statistics, foreign funds sold $7.8 billion in Indian equities net this month through Monday, the largest withdrawal since March 2020.

Goldman upgraded Indian stocks to overweight late last year, noting two-year earnings growth despite global macro challenges.