India's 2026 Market Outlook: Why Experts Remain Bullish Amid Global Shifts

As 2025 draws to a close, Indian equity markets are sending mixed signals. Benchmark indices remain close to record highs, but beneath the surface, the picture is far more nuanced.

Smallcase Managers, in its report, said that valuations are stretched across large parts of the market, smaller stocks are under pressure, and investors are becoming increasingly selective about where they deploy capital.

The managers noted that as US growth moderates and the Federal Reserve eventually pivots, interest-rate differentials should increasingly favour Emerging Markets, with India standing out as the most attractive destination.

Dhiren Shah, smallcase manager, Co-Founder, Kamayakya said, “We remain bullish on Indian equities in 2026, with a clear focus on stock selection rather than index levels. While public capex has driven growth so far, the next phase will come from a revival in private capex as corporate balance sheets strengthen and capacity utilisation rises, setting up the next leg of India’s structural growth.”

India’s macro backdrop remains constructive, aided by moderating inflation, the beginning of a rate-cut cycle and continued policy focus on manufacturing, infrastructure and exports.

The report expects the economy to grow at a steady 6–7 per cent in real terms, with inflation anchored closer to 4 per cent, implying a phase of more stable, though slightly lower, nominal growth compared to the previous decade.

“Tariff-related noise from the US, particularly around a potential Trump return, is more of a sentiment and liquidity risk for India than a structural one. It can tighten global liquidity, lift volatility and lead to temporary FII outflows, but it does not change India’s core growth story," said Vivek Sharma, smallcase manager, Investment Head, Estee Advisors.

At the same time, the AI-led surge in a few US mega-cap stocks has pulled a disproportionate share of global capital, leaving emerging markets under-owned despite stable fundamentals.

This has made Indian markets more vulnerable to short-term, flow-driven swings, even as domestic growth and earnings remain on a solid footing, Sharma added.

The report noted that in 2025, Indian equity performance had been uneven across market segments.

Large-cap stocks have delivered relatively stable returns of around 8 per cent YTD, with valuations holding steady at 22 times earnings.

"This suggests that gains have been driven more by earnings resilience than multiple expansion, reflecting investor preference for stability and balance-sheet strength," according to the report.

Mid-cap stocks have posted modest returns of about 3 per cent year to date (YTD), but have seen a sharp valuation reset, with P/E multiples compressing from 43 times to 33 times.

Small-caps have fared worse, declining 7.5 per cent YTD, alongside a fall in valuations from 34 per cent to 28 per cent.

Together, these trends point to tighter liquidity, rising risk aversion and greater scrutiny of earnings quality in the broader market, Smallcase managers highlighted.

- IANS