Liquidity alone won’t power markets anymore; earnings to drive next rally as West Asia risks ease: Aditya Birla Sun Life AMC's Harish Krishnan

The easing of geopolitical tensions in West Asia following the US-Iran ceasefire has shifted investor attention back to corporate earnings and domestic fundamentals, with the next phase of market gains unlikely to be driven by liquidity alone, according to Harish Krishnan, CIO – Equity, Aditya Birla Sun Life AMC.

Krishnan said markets are witnessing a normalisation of risk premiums rather than a change in underlying fundamentals after recent concerns around a prolonged disruption in West Asia. Over the past few weeks, investors had priced in the possibility of sustained geopolitical stress through higher crude oil prices and disruptions to global trade flows. However, with the ceasefire holding and diplomatic engagement strengthening, much of that uncertainty has faded.

“Markets have once again demonstrated resilience. The speed with which risk premiums expanded and then compressed shows how quickly sentiment normalises when worst-case outcomes fail to materialise,” Krishnan told Fortune India.

He said history suggests geopolitical events tend to create short-term volatility but rarely alter long-term market direction unless they significantly affect growth, inflation or financial conditions.

As geopolitical concerns recede, investor focus is expected to move back to earnings growth, liquidity conditions and economic activity. Krishnan argued that India’s long-term investment story remains intact and continues to be supported by structural factors such as formalisation, financialisation, and domestic demand.

Earnings, not liquidity, to decide market direction

According to Krishnan, the next leg of market returns will depend more on earnings execution than abundant liquidity, which had played a dominant role in supporting valuations across market segments in recent years.

He identified three major triggers investors should track.

The first is corporate earnings. Current market valuations already assume a meaningful improvement in profit growth, making broad-based earnings expansion critical. “The market would like to see growth move beyond a narrow set of sectors,” he said.

The second trigger is global trade policy and tariff developments. While tariff actions can influence sentiment and affect export-oriented sectors in the short term, their longer-term impact will depend on whether they alter investment and consumption behaviour.

The third is liquidity conditions — both domestic and global.

Krishnan highlighted one of the biggest structural changes in India’s markets: the growing role of domestic savings. Increased participation from local investors has reduced dependence on foreign capital and created a more stable source of market support.

He added that markets are entering a phase where stock selection will matter more than broad-based momentum. “The winners of the next cycle may not necessarily be the winners of the previous cycle. Companies with strong balance sheets, market leadership and visible earnings growth are likely to be rewarded,” he said.

Inflation, earnings misses among key risks

For the next 6–12 months, Krishnan sees risks coming less from geopolitics and more from factors that can affect earnings and liquidity over a sustained period.

The first major risk is global inflation remaining higher for longer. Persistent inflation could force central banks to maintain elevated interest rates, weighing on valuations globally. The second risk is earnings disappointment.

He said several parts of the market continue to price in optimistic growth expectations and warned that valuations become vulnerable when earnings fail to keep pace.

The third risk is policy uncertainty globally through tariffs, trade restrictions or regulatory changes that impact business confidence.

At the same time, Krishnan stressed that uncertainty is an unavoidable part of investing and historically periods of maximum uncertainty have often created attractive entry points for long-term investors.

Stay invested; SIPs continue to strengthen market resilience

On whether this is an appropriate time to invest, Krishnan maintained that the case for investing remains strong for those with a long-term horizon.

He said investors often lose more by waiting for certainty than by enduring volatility. “Markets do not wait for clarity. By the time uncertainty disappears, a significant part of the opportunity is often already behind us,” he said. He also pointed to systematic investment plans (SIPs) as a major structural force supporting Indian equities.

Historically, Indian markets were highly dependent on foreign flows, which amplified volatility. Today, a rising pool of domestic savings has made markets more resilient.

While SIP inflows cannot eliminate corrections during global shocks, they can cushion declines and support faster recoveries by maintaining liquidity.

India’s outperformance backed by domestic fundamentals

Krishnan said India’s relative strength should not be viewed as a consequence of weakness elsewhere but as a result of stronger domestic fundamentals.

Consumption, infrastructure investment, manufacturing growth and a deepening financial ecosystem are increasingly driving growth and reducing dependence on external demand.

He also highlighted healthier corporate balance sheets, a stronger banking system and rising household participation in financial assets. “Over the medium term, investors are likely to reward economies that combine policy stability, domestic demand and long-term growth visibility. India remains well placed to benefit from these structural trends,” he added.