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Indian equities, which lagged global and regional markets in 2025 despite marking a tenth consecutive year of gains, are poised for a stronger 2026. Support from policy measures, expected corporate earnings growth, and attractive large-cap valuations underpin this outlook. Financials and auto sectors are set to benefit from rate cuts and demand growth, while IT and small-caps face continued pressure. Domestic inflows and macroeconomic stability have helped markets absorb record foreign outflows, setting the stage for more selective recovery and continued market polarization.
India's stock markets are expected to deliver stronger returns in 2026, supported by improving corporate earnings, steady economic growth, and relatively attractive valuations following a year of underperformance compared to global peers. Advertisement
The Nifty 50 and Sensex rose about 10% and 8.5% in 2025, marking their tenth consecutive year of gains. However, they lagged emerging market and Asian indices, which increased roughly 30% and 27%, respectively. Analysts attribute the expected 2026 recovery to policy measures, higher earnings, and improving foreign investor sentiment. Goldman Sachs emerging market strategist, Sunil Koul, highlighted that valuations are becoming more reasonable, creating room for better performance.
Throughout 2025, Indian markets faced challenges including sluggish earnings growth, a weakening rupee, trade tensions with the U.S., and record foreign outflows. Despite this, benchmarks reached record highs in November after a 14-month gap, aided by tax cuts, Reserve Bank of India rate reductions, and early signs of corporate profit growth in the second half. However, gains were not maintained into December. Market volatility remained near record lows as domestic inflows, resilient earnings, and macroeconomic stability helped limit uncertainty and compress risk premiums even amid foreign selling.
Brokerages predict the Nifty could reach around 28,992 by the end of 2026, suggesting roughly 12% upside from current levels based on an average of 11 forecasts. Large-cap valuations are considered attractive, with India's premium to global and emerging markets dipping below its 10-year average after 2025 underperformance. Equity mutual fund inflows reached INR 3.22 trillion (USD 35.88 billion) by November, while total domestic institutional inflows were around USD 87 billion, according to provisional NSE data. Analysts note that performance will likely be uneven in 2026, with small-caps under pressure. While Nifty 50 and mid-caps trade near their 10-year average P/E ratios, small-caps remain expensive with forward P/E multiples of 28x, well above the long-term average of 17x. SBI Mutual Fund's Gaurav Mehta suggested that this valuation gap will continue to create market polarization. In 2025, the small-cap index fell 7% while mid-caps rose 5%.
Sector-wise, ten out of sixteen major sectors gained in 2025. Financials led the gains due to expectations of stronger credit growth, attractive valuations, RBI liquidity measures, and significant foreign investments. Auto stocks increased about 22% after tax and interest rate cuts, and metals jumped 27% on firm demand from China and anticipated U.S. rate cuts. In contrast, IT stocks fell 12% amid weak U.S. client spending and record foreign outflows of USD 9 billion from the sector.
Among individual stocks, Shriram Finance surged 70% following steady earnings and MUFG's 20% stake purchase. Maruti Suzuki and Eicher Motors each rose about 50% on improved earnings expectations after tax cuts. Tata Consultancy Services declined roughly 20%, marking its worst performance since 2008, while Trent fell 41%, making it the biggest loser on the Nifty.
Source Reuters
5th Jun, 2025
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