Market outlook 2026: Earnings, domestic demand to power next leg of Sensex, Nifty

As India steps into 2026, market experts believe the equity landscape is at a decisive inflection point, moving away from liquidity-driven momentum toward a phase where earnings delivery, policy alignment and macroeconomic stability will increasingly shape returns.

Even as global uncertainties, from geopolitics to shifting trade policies, remain fluid, India’s resilient domestic demand, improving earnings visibility and a supportive policy environment are seen positioning the market for a recovery from its 2025 underperformance.

Indian equity markets delivered a mixed performance in calendar year 2025, with benchmark indices scaling fresh all-time highs, even as they lagged global peers on a 12-month return basis.

Indian equities lag global peers

The Sensex and Nifty 50 touched all-time highs of 86,159 and 26,326, respectively, on December 1, 2025. For the full year, the Sensex gained over 9%, adding 7,082 points from its December 31, 2024 close of 78,139 to end 2025 at 85,221. In a similar trend, the Nifty50 rose 10.5%, or 2,485 points, from 23,645 to 26,130 over the same period.

Within domestic markets, performance remained uneven. The Nifty 500 and Nifty Midcap 150 rose 6.7% and 5.4%, respectively, over the period, while the Nifty Smallcap 250 declined 6%, reflecting sharp sector rotations, intermittent foreign outflows, currency volatility, and global trade uncertainty.

The data showed that Indian equities emerged as the weakest performers among major global markets over the past 12 months. This was attributed to the relative underperformance to valuation fatigue after a multi-year rally, moderation in sector-specific earnings, and intermittent foreign portfolio outflows amid global risk rebalancing.

In contrast, global markets posted strong double-digit returns. The S&P 500 Composite advanced 13.5%, supported by resilient earnings growth and sustained enthusiasm around artificial intelligence. The MSCI World Index climbed 15.4%, while Europe’s FTSE 100 surged 17.3%. Asian peers also outperformed India, with Japan’s Nikkei 225 soaring 31.5% and Hong Kong’s Hang Seng rallying 33.1%, aided by valuation-led rebounds and policy support.

Kotak Securities sees Nifty at 29,120 by Dec 2026

Kotak Securities’ MD & CEO Shripal Shah struck an optimistic tone, describing India’s financial landscape as entering “an era of resilience never seen before.” Despite a 17% drawdown from its September 2024 peak, the Nifty rebounded to fresh all-time highs, underscoring market resilience amid global volatility, he said.

Kotak Securities projects Nifty profits to grow 8.2% in FY26E and accelerate to 17.6% in FY27E, aided by GST rationalisation, rate cuts, benign inflation and a good monsoon. “Valuations have moderated, creating a positive setup for 2026,” Shah said.

Kotak has set a base-case Nifty target of 29,120 by December 2026, based on a 20x P/E on FY28E EPS of ₹1,456. Shah advised long-term investors to focus on quality stocks and accumulate on dips, while flagging geopolitical tensions, trade protectionism and currency volatility as key risks.

Motilal Oswal expects Nifty earnings to grow 10% in FY26

Motilal Oswal Financial Services’ Director and Head of Research, Institutional Equities, Gautam Duggad, noted that Indian equities materially underperformed global peers in CY25, driven by earnings downgrades, FII outflows, elevated valuations in pockets and global AI-led capital flows.

However, Duggad believes the environment is turning favourable. “We maintain a positive outlook on Indian equities, supported by strengthening corporate earnings, stimulative fiscal and monetary measures, and improving global sentiment around trade tariffs and geopolitical risks,” he said. Motilal Oswal expects Nifty earnings to grow 10% in FY26 and 15% in FY27, up from about 5% in FY25.

With the Nifty trading at a 12-month forward P/E of 21.3x—close to its long-term average—Duggad said consolidation has created more comfortable entry points in quality names. The firm remains overweight on Automobiles, Diversified Financials, Capital Goods, IT Services and Telecom, while underweight on Energy, Metals, Utilities and Staples.

Axis Securities sees cyclical recovery

Axis Securities’ deputy head of fundamental research Uttam Kumar Srimal believes a cyclical recovery is now unfolding. “As we enter 2026, the Indian equity market stands at a critical inflection point—transitioning from a phase dominated by domestic liquidity to one where earnings delivery, policy alignment, and macro stability will be the primary drivers of returns,” he said.

According to Axis Securities, consensus estimates point to a rebound in corporate earnings, accelerating to 12–15% year-on-year over FY26–27, supported by resilient GDP growth, revival in demand, and a supportive policy environment.

India’s growth momentum remains firm, with GDP growth forecasts for H1FY27 revised upward to 6.7–6.8%, while the RBI has raised its FY26 growth projection to 7.3%. Srimal noted that India stands out as “one of the few large markets where cyclical recovery is aligned with structural growth drivers,” creating a supportive medium-to-long-term backdrop for equities.

Valuations elevated, but earnings visibility improving

Jitendra Gohil, CIO - Listed Equities, Bajaj Alts expects several headwinds that weighed on Indian equities in 2025 to ease in 2026. “Resolution of the Russia–Ukraine conflict, trade agreements with the US and Europe, and a weaker dollar should help restore confidence in Indian equities,” he said, even as he cautioned that consensus margin assumptions may prove optimistic as private capex accelerates.

Gohil highlighted that Indian equity valuations are likely to remain elevated due to high ROEs, strong balance sheets, and favourable domestic macros, though record equity supply through IPOs, QIPs and OFS could limit further multiple expansion. The MSCI India Index currently trades at a P/E of 21.7x, a 56% premium to MSCI Asia ex-Japan—broadly in line with its 10-year average.

He also expects some profit-taking in global AI-related stocks, which could trigger rotation into Indian equities. “Volume-led expansion could drive low double-digit earnings growth,” Gohil said, adding that accommodative RBI policy and improving consumption should restore confidence.

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