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Equity Market Outlook 2026: Lessons from 2025 and What Lies Ahead

As we move into 2026, reflecting on 2025 provides valuable lessons for positioning and strategy. The equity markets in 2025 appeared range‑bound at the headline level. Still, beneath the surface there were meaningful opportunities driven by stock selection, domestic investor flows, macro policy shifts, and fundamental performance divergence. Understanding these dynamics helps create a disciplined and data‑backed framework for navigating 2026 with clarity and conviction.

This outlook consolidates market performance, valuation context, earnings trends, macroeconomic conditions and momentum indicators to guide strategic thinking for the year ahead.

Key Lessons from 2025

Range‑Bound Markets Offered Deep Opportunity During Corrections

CY25 will be remembered as a range‑bound year when viewed optically, yet decisive investors were able to capture substantial gains by deploying capital during corrections.

Metric	Value
Yearly Low	21,743.65 (April 2025)
Yearly High	26,325.80 (December 2025)
Perception	Consolidation around 22,000
Return from Low	+21.1%
Max Drawdown	-8.71%

Insights:

The Nifty tested the 21,700 level multiple times, creating high‑conviction entry points.
From these lows, recovering 18%–20% was possible even though the year looked sideways.
Markets tend to reward decisiveness during periods of fear rather than optimism at peaks.

This reinforces the principle that range‑bound markets punish indecision while rewarding structured deployment and disciplined positioning around corrections.

Nifty Showed Resilience in Relative Risk‑Control

Examining broad market performance highlights the importance of risk control.

Index	CY25 Return	Max Drawdown
Nifty 50	+10.72%	-8.71%
Nifty Midcap 100	+6.27%	-17.54%
Nifty Smallcap 100	-6.33%	-23.16%

Insight:

While mid and small caps experienced deeper drawdowns, the Nifty 50 delivered stronger returns with significantly less downside.
This pattern reinforces the value of risk‑controlled benchmarks and allocation discipline in environments where upside is modest.

Risk management mattered more than chasing upside alone, particularly where drawdowns eroded capital without commensurate performance.

Market Dispersion Favoured Bottom‑Up Selection

CY25 was a year where index direction was limited, but underlying stock performance diverged meaningfully across and within sectors.

Sector	Best Performer	Worst Performer	Spread
Banking	+25% to +30%	-15% to -20%	45–50%
IT Services	+20% to +25%	-10% to -15%	35–40%
Pharmaceuticals	+30% to +35%	-5% to -10%	40–45%
Auto	+15% to +20%	-20% to -25%	40–45%

Key learning:

In sideways markets, broad themes matter less, and company‑specific fundamentals matter more.
Sector averages hide significant dispersion; hence a bottom‑up approach dominated.
Stock selection based on balance sheet strength, earnings visibility and price momentum was the key differentiator.

This reinforces the importance of focusing on individual company outcomes rather than relying on macro or sector allocations alone in range‑bound environments.

Domestic Flows Have Rebalanced Market Structure

The flow dynamics in 2025 highlighted a structural shift in Indian market behaviour:

Investor Type	Net Flow (₹ Crore)
Domestic (SIP)	3,03,000
Domestic (Lumpsum)	1,20,000
FII (Net)	-1,56,000

SIP Inflows Highlight:

June 2025: ₹27,269 Cr
October 2025: ₹29,529 Cr
November 2025: ₹29,445 Cr

Despite significant foreign portfolio investor (FPI) outflows, domestic systematic investment plans (SIPs) and domestic institutional inflows provided structural support and helped cushion downside.

Lesson:

Domestic investors are price‑elastic, stepping in during corrections, while FII behaviour tends to be price‑inelastic. This dynamic has reduced downside vulnerability in Indian markets compared with historical FII‑led sell‑offs.

Avoid Performance Chasing, Focus on Consistency

Historical analysis of diversified funds shows that chasing recent performance is a poor predictor of future outcomes.

FY Period	Total Funds	% Top Quartile Next Year	% Bottom Quartile Next Year
Average	151	24%	33%

Key insight:

Nearly 76 % of funds that were top performers over three years did not stay in the top quartile the following year.
Approximately one‑third of them ended up in the bottom quartile.

This data underscores the importance of building portfolios around consistently performing strategies rather than chasing recent outperformers with cyclical or style‑led returns.

Performance Over the Last Year: Market Behaviour and Trends

Index Movements and Drawdowns

Index	Current Level (22‑Dec‑25)	Max Level	Min Level	Trough to Current	Peak to Current
Nifty 50	26,093	26,215	22,082	+17%	-1%
Midcap 150	22,190	22,493	17,750	+22%	-3%
Smallcap 250	16,489	18,502	13,756	+17%	-12%

Performance over standard time frames:

Period	Nifty 50	Midcap 150	Smallcap 250
3‑month	+3.87%	+2.77%	-4.38%
6‑month	+5.37%	+3.20%	-4.85%
1‑year	+7.40%	+2.14%	-10.31%

Insights:

The Nifty index demonstrated relative strength and lesser drawdown compared with the broader mid and small‑cap indices. This underscores again that risk control matters as much as upside participation.

Historical average drawdowns reinforce that markets are inherently cyclical and meaningful recovery periods follow major dips, especially for broad benchmarks like Nifty 50.

2025 Market Shaping Events and Their Influence

Key geopolitical, policy and macro events shaped investor sentiment and market direction in 2025:

Month	Event	Implication
January	Fed rate cut hints	Created initial anticipation of easing, supporting valuations
February	RBI repo rate cuts	Brought cost of capital down, shifting stance cautiously
February	Union Budget	Income tax relief expanded consumption potential
April	US Reciprocal Tariffs	Global trade tensions introduced volatility
July	India‑UK FTA	Boosted export competitiveness
August	US‑India tariff escalation	Short‑term export headwinds in select sectors
September	GST cuts	Consumption Support via lower indirect taxes
October	Festive season acceleration	Retail and auto demand improved
December	RBI continued rate cuts and liquidity support	Reinforced accommodative stance into year‑end

These events collectively influenced market confidence, liquidity, and sector performance, shaping a narrative that balanced caution and gradual growth.

Valuation Alignment with Earnings Expectations

Markets appear fairly priced heading into 2026. Valuations do not show excess froth, indicating a reliance on corporate earnings growth for returns rather than expansion of valuations.

Fair Value vs Current (16‑Dec‑25)

Index	Current	Fair	Froth (%)
Nifty 50	25,860	26,223	-1.40%
Nifty 100	26,395	27,113	-2.70%
Midcap 150	21,966	23,229	-5.40%
Smallcap 250	16,328	19,012	-14.10%

Expected 2026 Fair Value (Based on FY27 EPS)

Index	Expected FY27 EPS	Fair Value
Nifty 50	1,339	27,298
Nifty 100	1,380	28,262
Midcap 150	816	24,295
Smallcap 250	726	19,970

Interpretation:

A fair value of ~27,300 for the Nifty 50 in March 2026 suggests a modest upside in line with forward earnings growth. This supports a view that returns in 2026 are likely to be driven by earnings expansion rather than multiple expansion.

Corporate Earnings Trends in FY26

Strong earnings momentum will be a key driver of returns in the year ahead.

Earnings Performance (FY26)

Metric	Nifty 50	Nifty 100	Midcap 150	Smallcap 250
1QFY26 EPS	275	285	153
YoY EPS Growth (Weighted)	8.3%	9.3%	17.8%	0.3%
PAT Growth (YoY)	11.6%	11.8%	15.8%	4.2%

Metric	2QFY26 EPS	YoY EPS Growth	PAT Growth
Nifty 50	248	1.7%	6.0%
Nifty 100	263	4.5%	11.1%
Midcap 150	176	22.0%	25.9%
Smallcap 250	134	17.1%	19.4%

Key observations:

Broad indices exhibited modest earnings growth in early FY26, partly due to heavyweight companies underperforming relative to mid and small cap contributors.
Midcap and small cap segments displayed stronger earnings momentum, reflecting structural growth within certain pockets of the economy.

Going forward, corporate profitability is expected to be supported by:

Consumption enhancements from fiscal measures and GST reforms
Liquidity support through continued rate adjustments and RBI interventions
Government expenditure aligning with infrastructure and manufacturing priorities

Macro‑Economic Backdrop: Growth, Inflation and Fiscal Signals

India’s macro‑economic environment in 2025 remained supportive of sustained growth despite global headwinds.

GDP and Inflation Trends

FY26 GDP growth expected at ~7.3%, driven by robust services and industrial activity
Inflation projected at ~2.0%, well below historical norms
Deceleration in food inflation contributed to broader CPI moderation

Nominal GDP growth is expected to approach 9%, with medium‑term prospects above 10–11% as inflation normalises toward RBI targets.

Fiscal Signals and Tax Trends

Fiscal deficit remained disciplined at 52.6% of the full year target
GST collections were up 7.4% year‑on‑year for the first eight months of FY26
Direct tax collections jumped due to higher corporate tax realisations

Continued capex growth of ~32.4% year‑on‑year reflects a strong policy focus on infrastructure and industrial expansion.

FII and DII Flows in 2025

Flows remained a key driver of sentiment and market structure:

Month	FII Flows (₹ Cr)	DII Inflows (₹ Cr)
Jan-25	-78,027	86,592
Feb-25	-34,574	64,854
Mar-25	-3,973	37,585
Apr-25	4,223	28,229
May-25	19,860	67,642
Jun-25	14,590	72,673
Jul-25	-17,741	60,939
Aug-25	-34,993	94,828
Sep-25	-23,885	65,346
Oct-25	14,610	52,794
Nov-25	-3,765	77,083
Dec-25	-14,185	52,032
Total CY25	-1,57,860	7,60,597

This data highlights that FIIs were net sellers, while domestic investors provided sustained inflows. Domestic participation helped stabilise markets despite global uncertainties and capital flow volatility.

Momentum Indicators for 2026

Short-Term Signals

Market breadth shows an increase in stocks participating in upward moves
Price volume trends point to accumulation zones during corrections

Medium‑Term Indicators

Liquidity conditions remain accommodative
Volatility indices suggest lower tail risk in the near term

Taken together, these indicators suggest constructive momentum, albeit within a framework that favours earnings visibility and fundamental clarity.

Conclusion: A Disciplined and Earnings‑Led Outlook for 2026

Reflecting on the lessons from 2025, the 2026 market outlook emphasises:

Range‑bound markets reward disciplined, decisive positioning
Nifty50’s resilience highlights the value of risk‑controlled benchmarks
Bottom‑up stock performance will matter more than broad sector themes
Domestic investor participation has become structurally significant
Valuations are fair, and forward earnings momentum will be key
Macro fundamentals remain supportive of sustained growth
Momentum indicators point to constructive market dynamics

For 2026, a disciplined approach that balances risk, earnings growth and structural themes will be essential. Markets are not likely to be driven by valuation excess alone, and returns will depend on earnings delivery, selective positioning and strategic patience. An uncomplicated strategy for your wealth will compliment the macro factors.

FAQs

Moderate headline returns with strong dispersion across stocks, where fundamentals mattered more than index leadership.

Valuations are fair with negative froth, suggesting earnings will drive returns rather than multiple expansion.

Domestic flows are likely to remain a stabilising force, particularly if global volatility persists.

Strong GDP, lower inflation, fiscal discipline and rising corporate profitability underpin the outlook.

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