- Foreign holdings declined to 3.2%, raising concerns about sustainability despite strong domestic investor confidence
The Pakistan Stock Exchange (PSX) has witnessed an extraordinary bullish run in 2025, with the KSE-100 Index soaring to an all-time high of 139,703.29 points on July 22, 2025. It has achieved a 78.70% year-on-year growth. This remarkable performance follows a stellar 2024, during which the PSX gained 87%, outpacing global benchmarks like the MSCI Emerging Markets and Frontier Markets Indices, which rose by only 5%. The market capitalization of listed companies surged by 61% to PKR 14.6 trillion in 2024, with sectors such as pharmaceuticals, jute, and transport leading the charge with gains of 198%, 182%, and 130%, respectively. It reflects a year-to-date gain of 55.27% and a year-on-year increase of 78.70%
This article provides a comprehensive analysis of the authenticity of this aggressive upward trend, the factors fueling it, the potential consequences of an unsustainable rally, and the likelihood of a market crash. By examining macroeconomic indicators, sector-specific performance, and global and regional risks, this article offers insights for investors, policymakers, and stakeholders in Pakistan’s capital market. The analysis draws on recent economic data, market reports, and historical trends to assess whether the PSX’s performance reflects genuine economic progress or speculative exuberance, while also estimating the risks and implications of a potential correction.
This bullish momentum has sparked widespread optimism among investors, policymakers, and analysts, positioning the PSX as a beacon of economic hope in a country historically plagued by fiscal deficits, political instability, and external debt pressures. However, the rapid ascent of the KSE-100 Index has also raised critical questions: Is this upward trajectory sustainable, or is it a speculative bubble? What are the driving forces behind this rally? If the trend is unsustainable, what are the potential consequences, and how likely is a market crash? This article addresses these questions by analyzing the macroeconomic and sector-specific factors underpinning the PSX’s performance, evaluating its authenticity, and assessing the risks of a correction in 2025.
Is the Bullish Trend Real? Performance Overview
The PSX’s performance in 2025 has been nothing short of spectacular. The KSE-100 Index, which closed 2024 at 90,092.54 points, surged by 55.27% year-to-date to reach 139,703.29 points by July 22, 2025. Daily trading volumes have averaged over 1.2 billion shares, reflecting robust market activity. The market’s capitalization has continued to grow, with listed companies collectively valued at over PKR 15 trillion by mid-2025. Key sectors driving this growth include pharmaceuticals, which have benefited from price deregulation, and energy firms like Oil and Gas Development Company Limited (OGDCL) and Pakistan Petroleum Limited (PPL), which have capitalized on dollar-denominated revenues. The PSX’s performance has also been bolstered by a 14.1% year-on-year increase in bank deposits, reaching PKR 35.5 trillion by June 2025, signaling a shift toward formal savings and equity investments.
Evidence Supporting the Rally’s Authenticity
Several macroeconomic and policy developments suggest that the PSX’s bullish trend is grounded in genuine economic improvements:
- Current Account Surplus: In FY25, Pakistan recorded a current account surplus of $2.1 billion, the first in 14 years. This milestone was driven by record remittances of $32 billion, import compression policies, and inflows from a $7 billion IMF bailout secured in September 2024. The surplus has strengthened Pakistan’s foreign exchange reserves, which reached $19 billion in 2025, enhancing investor confidence in the country’s economic stability.
- Monetary Policy Easing: The State Bank of Pakistan (SBP) has pursued an aggressive monetary easing cycle, reducing the key policy rate by 200 basis points to 13% in December 2024, marking the fifth consecutive cut since June 2024. This has lowered bond yields by over 1100 basis points, redirecting capital from fixed-income securities like Treasury bills to equities. The increased liquidity has particularly benefited high-leverage sectors such as pharmaceuticals, energy, and banking.
- IMF Bailout and External Financing: The approval of a $7 billion IMF Extended Fund Facility in September 2024 has been a game-changer for market sentiment. The bailout, coupled with $2.5 billion in foreign aid commitments from bilateral partners, has alleviated concerns about Pakistan’s ability to meet its external debt obligations. Additionally, potential climate financing of $1 billion has further bolstered optimism about long-term economic resilience.
- Attractive Valuations: Despite the KSE-100’s rapid ascent, the PSX’s price-to-earnings (P/E) ratio remains at approximately 6, well below its historical mean of 8.3. This suggests that stocks are still undervalued relative to their earnings potential, making the market an attractive destination for both domestic and institutional investors. Topline Securities projects the P/E ratio to rise to 5.75 by December 2025, still indicating room for growth.
- Sector-Specific Resilience: The pharmaceutical sector has thrived due to the deregulation of non-essential drug prices, enabling companies to pass on cost increases to consumers. Similarly, energy firms have benefited from a strong US dollar, which enhances their dollar-denominated revenues. The transport and automotive sectors have also seen gains due to rising consumer demand, supported by declining inflation (7.2% in October 2024) and improved purchasing power.
These factors collectively suggest that the PSX’s bullish trend is underpinned by tangible economic progress, positioning the market as a reflection of Pakistan’s broader recovery.
Counterarguments: Signs of Potential Overvaluation
Despite these positive indicators, several concerns suggest that the rally may not be entirely sustainable:
- Incomplete Structural Reforms: While macroeconomic stabilization has been achieved, structural reforms — such as broadening the tax base, improving energy sector efficiency, and addressing circular debt—remain incomplete. The absence of these reforms raises questions about the long-term sustainability of economic growth and, by extension, the PSX’s performance.
- Geopolitical Vulnerabilities: The PSX has demonstrated vulnerability to geopolitical shocks. For instance, in May 2025, a drone attack incident led to a 6.3% single-day plunge in the KSE-100 Index, triggering circuit breakers and halting trading. Ongoing tensions with India and regional instability in the Middle East could precipitate similar disruptions.
- Foreign Investor Hesitancy: Foreign holdings in the PSX’s KSE All Shares have declined significantly, from 28.7% in 2017 to just 3.2% in 2025. This reflects limited international confidence in Pakistan’s market, despite domestic enthusiasm. The lack of foreign capital inflows could limit the market’s ability to sustain its upward trajectory in the face of external shocks.
- Speculative Trading Risks: The rapid rise in retail investor participation, particularly among high-net-worth individuals, has raised concerns about speculative trading. While domestic investors hold 75.8% of KSE All Shares, their aggressive buying could lead to overvaluation in certain sectors, increasing the risk of a correction.
These factors highlight the need for caution, as the PSX’s bullish trend, while supported by fundamentals, is not immune to external pressures or speculative excesses.
Factors Driving the Bullish Trend
The PSX’s remarkable performance in 2025 can be attributed to a confluence of macroeconomic, policy, and sector-specific factors:
1- Macroeconomic Stabilization:
- The current account surplus of $2.1 billion in FY25 has been a significant driver, supported by record remittances, import controls, and IMF inflows. This has stabilized the Pakistani rupee, which has appreciated slightly against the US dollar, reducing currency risk for investors.
- Inflation has declined to 7.2% in October 2024, down from double-digit levels in previous years, boosting consumer confidence and corporate earnings. The stable macroeconomic environment has encouraged both retail and institutional investors to shift capital into equities.
2- Monetary Policy Easing:
- The SBP’s rate cuts have created a favorable environment for equity investments. By lowering the policy rate to 13%, the central bank has reduced borrowing costs for companies, particularly in capital-intensive sectors like energy and manufacturing. The decline in bond yields has also made equities more attractive compared to fixed-income securities.
- The increased liquidity has fueled gains in sectors with high leverage, such as pharmaceuticals and banking. For instance, commercial banks have seen improved profitability due to revised tax structures and higher lending activity.
3- Sector-Specific Performance:
- The pharmaceutical sector has been a standout performer, with companies like Searle Pakistan and Abbott Laboratories posting significant gains due to price deregulation and rising domestic demand. The sector’s market capitalization surged by 198% in 2024, reflecting its resilience and growth potential.
- Energy companies, including OGDCL and PPL, have benefited from a strong US dollar, which enhances their export-oriented revenues. The energy sector’s performance has been further supported by government efforts to resolve circular debt issues.
- The transport and automotive sectors have seen gains due to increased consumer spending, driven by lower inflation and improved economic conditions. Companies like Pak Suzuki and Indus Motor have reported higher sales volumes, contributing to the PSX’s overall growth.
4- Domestic Investor Confidence:
- Domestic investors, including high-net-worth individuals and institutional funds, have been the backbone of the PSX’s rally, holding 75.8% of KSE All Shares. The low P/E ratio and high dividend yields (averaging 7–8% for blue-chip stocks) have made the PSX an attractive investment destination.
- The formalization of savings, evidenced by a 14.1% increase in bank deposits to PKR 35.5 trillion by June 2025, has provided a steady flow of capital into the equity market. This trend reflects growing confidence in Pakistan’s financial system.
5- Policy Reforms and Privatization:
- The government’s commitment to IMF-mandated reforms, including tax policy adjustments and privatization of state-owned enterprises, has bolstered investor sentiment. For instance, the planned privatization of Pakistan International Airlines (PIA) and other entities has signaled a shift toward market-friendly policies.
- Anticipated climate financing of $1 billion, coupled with ongoing economic reviews under the IMF program, has further enhanced optimism about Pakistan’s long-term growth prospects.
Potential Consequences of an Unsustainable Trend
If the PSX’s bullish trend proves unsustainable, the consequences could be far-reaching for investors, corporations, and the broader economy:
1- Market Correction and Wealth Erosion:
- A significant correction, defined as a decline of 20% or more in the KSE-100 Index, could erode investor wealth, particularly for retail investors who entered the market at peak levels. Historical precedents, such as the 2017 correction (from 53,124 to 37,919 points within seven months) and the 2020 COVID-19 crash (a 62% drop), highlight the potential severity of a downturn.
- A correction could disproportionately affect small investors, who may lack the financial cushion to absorb losses, leading to a broader loss of confidence in the capital market.
2- Loss of Investor Confidence:
- A sharp market decline could deter both domestic and foreign investors, reducing liquidity and hindering the PSX’s role as a platform for capital formation. Foreign investors, already holding a mere 3.2% of KSE All Shares, may further withdraw, exacerbating market volatility.
- A loss of confidence could also discourage retail participation, slowing the formalization of savings and diverting capital back to informal investment avenues like real estate or gold.
3- Economic Ripple Effects:
- A decline in market capitalization could limit corporate access to capital, slowing investment in critical sectors like energy, infrastructure, and manufacturing. This could hinder Pakistan’s economic growth, particularly in export-oriented industries.
- Reduced market activity could also impact government revenues from capital gains taxes, constraining fiscal space for public investments.
4- Policy Reversal Risks:
- A market crash could pressure policymakers to reverse monetary easing or delay structural reforms, potentially destabilizing the economy. For instance, a return to high interest rates could choke corporate borrowing and exacerbate debt pressures.
- Geopolitical or global economic shocks could force the government to prioritize short-term stabilization over long-term reforms, undermining investor confidence further.
Chances of a Market Crash in 2025
Likelihood Assessment
While the PSX’s bullish trend is supported by strong fundamentals, several risks could precipitate a market crash:
1- Geopolitical Instability:
- The May 2025 drone attack incident, which triggered a 6.3% single-day drop in the KSE-100 Index, underscored the market’s vulnerability to geopolitical shocks. Ongoing tensions with India, coupled with regional instability in the Middle East, could lead to similar disruptions.
- Pakistan’s reliance on imported energy makes it susceptible to global commodity price shocks. For instance, oil prices rising above $100 per barrel due to geopolitical conflicts could strain the current account, undermining investor confidence.
2- Global Economic Shocks:
- A stronger US dollar or tightening of global monetary policy could increase Pakistan’s import costs and debt servicing burdens, negatively impacting the PSX. For example, a 10% appreciation in the US dollar could raise import costs by PKR 500 billion annually.
- Global economic slowdowns, particularly in major trading partners like China and the EU, could reduce demand for Pakistani exports, affecting corporate earnings and stock valuations.
3- Overvaluation Concerns:
- While the PSX’s P/E ratio remains low at 6, rapid index growth without corresponding earnings improvements could lead to overvaluation in certain sectors. Speculative trading by retail investors, particularly in high-growth sectors like pharmaceuticals, could exacerbate this risk.
- Topline Securities projects the KSE-100 Index to reach 150,000 points by December 2025, implying a P/E ratio of 5.75. However, sustained speculative buying could push valuations beyond sustainable levels.
4- Policy Missteps:
- Failure to implement IMF-mandated reforms, such as tax base expansion or energy sector restructuring, could undermine investor confidence. Delays in privatization or mismanagement of fiscal policy could also trigger a sell-off.
- Regulatory lapses, such as inadequate oversight of speculative trading, could amplify market volatility.
Quantitative Estimation
Based on historical trends and current conditions, the probability of a significant market crash (a decline of 20% or more within a short period) in 2025 is estimated at 20–30%. This assessment is informed by the following:
- Historical Precedents: The PSX has experienced significant corrections in the past, including a 62% drop during the 2020 COVID-19 crisis and a one-third decline in 2008. However, the market’s response to the 2020 crash was relatively calm, suggesting improved resilience.
- Current Stability: The current account surplus, stable reserves ($19 billion), and low inflation (7.2%) provide a strong buffer against a severe downturn. The PSX’s low P/E ratio and high dividend yields further reduce the likelihood of a crash.
- Risk Factors: Geopolitical risks, speculative trading, and limited foreign participation increase the probability of a correction. However, the dominance of domestic investors (75.8% of KSE All Shares) and regulatory safeguards like circuit breakers mitigate the risk.
Mitigating Factors
Several factors could limit the severity of a potential crash:
- Circuit Breakers: The PSX’s circuit breaker mechanism, which halts trading after a 5% single-day drop, helps prevent panic selling and stabilize the market, as demonstrated during the May 2025 incident.
- Regulatory Oversight: The Securities and Exchange Commission of Pakistan (SECP) maintains robust oversight, ensuring transparency and reducing the risk of market manipulation.
- Diversified Investor Base: The dominance of domestic investors reduces reliance on volatile foreign capital, providing stability during global shocks.
- Strong Fundamentals: The PSX’s low valuations, coupled with macroeconomic improvements, provide a cushion against significant downturns.
Policy Recommendations
To sustain the PSX’s bullish momentum and mitigate crash risks, policymakers and stakeholders should consider the following:
- Accelerate Structural Reforms: Prioritize tax base expansion, energy sector efficiency, and privatization to ensure long-term economic stability.
- Enhance Foreign Investor Confidence: Address geopolitical concerns and improve regulatory transparency to attract foreign capital, increasing market liquidity.
- Strengthen Risk Management: Expand circuit breaker mechanisms and implement real-time monitoring of speculative trading to prevent overvaluation.
- Promote Financial Literacy: Educate retail investors about market risks to reduce speculative excesses and enhance market resilience.
- Diversify Sectoral Growth: Encourage investment in underrepresented sectors like technology and renewable energy to reduce reliance on traditional sectors like energy and banking.
Conclusion
The Pakistan Stock Exchange’s bullish run in 2025 reflects a combination of macroeconomic stabilization, monetary easing, sector-specific growth, and robust domestic investor participation. With the KSE-100 Index reaching 139,703.29 points and a P/E ratio of 6, the market remains attractively valued, supported by a $2.1 billion current account surplus, a $7 billion IMF bailout, and record remittances. However, incomplete structural reforms, geopolitical vulnerabilities, and speculative trading pose risks to sustainability. While the likelihood of a market crash in 2025 is moderate (20–30%), the consequences of an unsustainable rally could include wealth erosion, loss of investor confidence, and economic ripple effects. By prioritizing reforms, enhancing regulatory oversight, and promoting diversified growth, Pakistan can sustain the PSX’s momentum and solidify its position as a leading emerging market. Investors should focus on fundamentally strong sectors like energy, banking, and pharmaceuticals, while remaining vigilant of geopolitical and global economic risks. Future research should monitor the interplay of domestic reforms and external shocks to assess the PSX’s long-term trajectory.
Nazir Ahmed Shaikh is a freelance writer, columnist, blogger, and motivational speaker with a passion for exploring diverse topics. His thought-provoking articles reflect a broad spectrum of interests and insights. He can be reached at “sir.nazir.shaikh@gmail.com.”