India’s Market Shift: Focus on Earnings and Liquidity in 2026

Indian equity markets are entering a more discerning phase, moving beyond narrative-driven rallies to prioritize earnings delivery and global liquidity conditions. This shift, as highlighted by market experts, suggests a need for investors to adopt a more selective approach, focusing on companies with strong fundamentals and sustainable growth prospects.

Navigating Market Volatility

Following a period of post-Budget volatility, Indian markets are expected to remain range-bound in the near term. While the overall bias remains constructive, investors should prepare for continued fluctuations. Key variables influencing market stability include the US Federal Reserve’s policy outlook, progress on resolving issues surrounding India’s purchases of Russian oil, and the actions of the US President regarding trade relations.¹

The Importance of Earnings Visibility

A critical caution for investors is to avoid chasing small- and mid-cap stocks trading at high price-to-earnings (P/E) multiples (40-50x) without clear earnings visibility. Experts warn that multiple compression is likely as the market increasingly values performance over speculative stories.¹ The focus is shifting towards tangible results and sustainable profitability.

Key Factors Driving Market Direction

Beyond the immediate term, three factors will be pivotal in shaping the Indian market’s trajectory:

• Corporate Earnings Trajectory: The extent of earnings upgrades or downgrades for fiscal years 2026-2027 will be crucial, particularly after the Q3 earnings season.
• Global Macro Dynamics: The US Federal Reserve’s policy stance, bond yield trajectories, and dollar strength will significantly influence risk appetite and capital flows.
• Foreign Institutional Flows: Whether recent foreign institutional investor (FII) buying represents a tactical repositioning or the start of sustained structural inflows remains to be seen.

The market will increasingly be driven by earnings and liquidity, rather than event-led movements.¹

Sector Outlook for 2026

Several sectors are poised for outperformance in 2026:

• Banking & Financials: Strong balance sheets and steady credit growth underpin the positive outlook for this sector. Public sector banks, in particular, appear attractively valued, while private banks are demonstrating a strong recovery.
• Capital Markets & Asset Managers: The structural financialization trend continues to support growth in this sector. Asset managers and wealth managers are expected to outperform brokerages, despite recent increases in securities transaction tax.
• Infrastructure, Defence, and Railways: Strong capital expenditure visibility makes these sectors compelling long-term investments.

Areas of Concern: Overheated Themes

Investors should exercise caution with themes that have attracted capital based on long-term potential rather than near-term earnings. While these trends may be valid, current valuations often discount overly optimistic scenarios without sufficient consideration for execution risks or growth delays. Specifically, segments within the small and midcap universe trading at premium P/E ratios of 40x to 50x or higher, with limited earnings track records, are a cause for concern.¹

Strategies for Small & Midcap Investing

In this evolving market environment, a rigorous stock selection process is essential. Investors should prioritize companies demonstrating:

• Clear earnings visibility over the next 12-24 months
• Robust cash generation and sustainable free cash flows
• Balance sheet strength to withstand volatility and fund growth

Chasing momentum-driven trades or investing in narrative-heavy businesses lacking fundamental backing is likely to lead to disappointment. Accessing this opportunity through professionally managed equity mutual funds or portfolio management services (PMS) may be a strategic approach for many investors.¹

Valuation and FII Sentiment

India currently commands a valuation premium compared to most emerging markets, but this is supported by superior earnings consistency, robust domestic growth drivers, and improved corporate governance standards.¹ With projected Nifty earnings per share of approximately ₹1,280 for FY27, the index trades at around 20x forward earnings, which is in line with its historical average.³

Foreign institutional investors are showing renewed, albeit selective, interest in Indian equities. India remains a core structural allocation within emerging market portfolios. Recent capital inflows suggest growing valuation comfort and restored confidence in India’s long-term growth. However, FII participation will remain data-driven and influenced by global liquidity conditions.¹ Sustained inflows depend on a stable US Federal Reserve policy and tangible corporate earnings growth.¹

Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own and do not represent the views of the Economic Times.¹

Sources:

1. ETMarkets Smart Talk
2. K Sandeep Nayak on Indian market recovery – LinkedIn
3. Indian stock market in a recovery phase, increase equity allocation… – Mint