Key Points

"The domestic stock market is entering FY26 with cyclical headwinds but strong structural drivers," Enquirus Securities said in its report.

"We are Overweight on auto, capital market, cement, FMCG, infra, internet platforms, NBFC, oil & gas sectors, while we are underweight on building materials, industrials and defence, real estate, textile, logistics sectors,” said Maulik Patel, Head of Research, Equirus Securities.

The brokerage house has kept a neutral stance on banks, chemicals, consumer durables, EMS, IT services, metals and mining, healthcare, and retail sectors.

The brokerage, in the report, paints a note of caution on smallcaps, pointing out that the small-cap forward P/E ratio stands at 1.25 times, compared to the long-term average of 0.88 times (just below the 1.3 times peak), with Nifty 50 trading above its 10-year average.

Midcaps remain elevated but offer stronger earnings visibility than smallcaps, where multiple expansion dominates, the report highlighted.

"In an environment where CY25 EPS forecasts have fallen (-)13.8 per cent, the steepest cut since the pandemic, investing wisely backed by adequate research is key to outperformance," Patel said.

Near term, leadership is likely to shift toward largecaps and quality midcaps as valuations and earnings expectations re-align.

Largecaps provide the best margin of safety, midcaps should be approached selectively in structural growth areas, and smallcaps warrant caution until earnings catch up, according to the report.

The report suggested that the recent trends indicate a clear turnaround in rural consumption. Rural wages, after years of stagnation or contraction, have been rising steadily since late 2024 — with February–May 2025 showing the strongest year-on-year gains since 2018 (overall rural wages +3.5 per cent in May 2025).

This wage growth directly boosts rural disposable income.

CPI inflation has fallen below 4 per cent, liquidity has moved into surplus, and the RBI has begun a gradual rate-cut cycle.

"Historically, such easing delivers muted short-term returns but stronger 12-month gains when macro conditions are supportive, favouring a barbell approach between cyclicals (financials, industrials) and defensives (consumer staples, healthcare)," the report noted.

Moreover, domestic institutional investors (DIIs) now surpass FIIs in equity ownership, supported by strong SIP inflows (over 27 per cent CAGR FY17-FY25), creating a stable domestic demand base.

Higher domestic participation absorbs FII selling and reduces market sensitivity to global risk-off events, a secular positive for valuation resilience, the report said.

- IANS