FY26 outlook: Indian equities to outperform other asset classes; Nifty50 poised for 12-15% returns

As returns from major asset classes including gold and realty started declining, investors are likely to benefit from investments in equities, according to a latest report. Indian equities are expected to outperform all asset classes in the financial year 2025-26, supported by favorable valuations and a strong growth outlook, according to smallcase managers.

The India's capital markets are projected to grow steadily in FY26, supported by expected GDP growth of 6.2–6.5% and strong domestic demand. The benchmark index Nifty50 is anticipated to deliver 12-15% returns, with earnings per share (EPS) estimated around ₹1,160. It added that foreign portfolio investors (FPI) have shown renewed confidence, injecting over $4 billion in recent sessions.

“As of May 18, 2025, a total of 878 companies have reported their earnings, with a 10% year-on-year growth in Q4FY25. Despite a modest 5.79% year-on-year growth for FY25—significantly lower than the 35.1% growth recorded in FY24, the market sentiment has improved, reflected in FII net inflows of ₹16,757 crore in FY26 so far, alongside an 8% return from the Nifty 50 and a 10% gain in the Smallcap 100 index," Shailesh Saraf, smallcase Manager and Founder, Value Stocks.

According to smallcase managers, the global trade tensions, U.S. tariffs, geopolitical uncertainty remain a key risk for Indian capital market.

“A cautiously optimistic outlook for FY26 is justified. Key positives include a stable government, the prospect of lower interest rates, and potential earnings rebound. While global trade tensions remain a concern and could pose intermittent risks to market momentum, corporate earnings continue to show resilience particularly in the banking, auto, and infrastructure sectors. We believe this year will be of consolidation with earnings improvement in companies and theme-based investing will be prevalent,” Robin Arya, smallcase Manager and Founder, GoalFi.

smallcase Managers note that earnings for Q4FY25 have been stronger than anticipated driven by strong sales and profit growth. However, it highlights that forward-looking earnings revisions are still showing signs of weakness, with more downgrades than upgrades more so as corporate investment growth remains sluggish.

The market has bounced back significantly over the past two months, fully reversing its year-to-date decline. So far, Nifty stocks have delivered YoY sales growth of 9%, while EBITDA rose 6%, and profit increased 4% on annual basis.

Analysts believe that with inflation below 4%, the real interest rate has turned significantly positive, strengthening the case for policy easing. The market has effectively priced in a cut, even if it's not yet formally announced. Lower borrowing costs can spur corporate investment and consumer spending, benefiting sectors like banking, real estate, and autos. Equity markets may rally in anticipation of improved earnings and liquidity.

Though, smallcase Managers do note that global trade tensions persist, particularly with Trump’s reciprocal tariffs potentially rattling India’s export-oriented sectors and overall market sentiment. They believe sectors like electronics, pharma, auto & auto components and textiles will be in focus till the tariff wars wane. They continue to remain positive about sectors such as Infrastructure, BFSI (incl. PSU Banks), Electronics/EMS, Automobiles/Auto Anc, Consumer/FMCG, Renewable Energy, while remaining cautious about IT, Pharma, Chemicals, Capital Goods, Real Estate.

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