 "Motilal Oswal on 2026 outlook: Quality and selectivity to drive mkt returns")
As calendar year 2025 draws to a close, Indian equity markets are stepping into 2026 on firmer ground after a year that tested patience more than risk appetite. The Nifty ended CY25 with gains of nearly 10% year-to-date, trading close to all-time highs, having clawed back from a prolonged correction that began in late 2024, said Motilal Oswal in a note.
But unlike the exuberant rallies of recent years, the mood heading into 2026 is more measured. Investors are bracing for steadier, selective growth—driven by earnings recovery and policy support—rather than a broad-based surge.
"India’s long-term structural growth story remains intact, supported by favourable demographics, rising digital adoption, increasing financialisation of household savings and continued reform momentum. We believe the government’s ongoing policy initiatives will help reset the trajectory of corporate earnings over the medium term. Additionally, any resolution of the tariff stalemate with the US could act as an important external catalyst for markets," said Motilal Oswal in note.
Valuations tell a nuanced story. Large-cap stocks appear relatively better placed after last year’s reset. The Nifty-50 is trading at a one-year forward price-to-earnings multiple of 21.5x, just about 4% above its long-period average.
In contrast, the Nifty Midcap-100 and Smallcap-100 remain richly valued at 28.3x and 25.9x, carrying premiums of roughly 26% and 50% over their long-term averages. This divergence reflects the sharp run-up in mid- and small-cap stocks in 2023 and 2024, followed by a necessary phase of mean reversion through 2025.
For much of the past year, Indian equities were in recalibration mode.
After hitting record highs in September 2024, markets slipped into correction territory and remained under pressure until early April 2025 amid rising global trade tensions and US tariff actions.
Persistent foreign institutional investor outflows, currency volatility and geopolitical risks weighed on sentiment. While domestic macro fundamentals held up reasonably well, moderation in corporate earnings—especially beyond large caps—kept indices largely range-bound.
Segment-wise performance underscored this shift. Large-cap stocks delivered modest but relatively stable returns, while broader indices saw sharper swings. After outsized gains in the previous two years, mid-caps managed only about 6% returns in 2025, while small-caps slipped around 6%. The cooling-off helped temper excesses and reset expectations, setting a healthier base for the next cycle.
"From an investment perspective, we have a positive stance on large-cap stocks, particularly in sectors where earnings growth is strong and valuations remain reasonable. Financials continue to be preferred segment, backed by healthy credit growth, improving return ratios and strong balance sheets. We also remain positive on consumption-linked sectors such as consumer discretionary and automobiles, as demand recovery broadens and revenue growth improves.
Industrials and capital goods remain well positioned, benefiting from government-led reforms, infrastructure spending and localisation initiatives across manufacturing, electronics, data centres and energy transition-related segments. We are constructive on IT services from a medium-term perspective, as global technology spending is expected to recover gradually with stabilising macro conditions and increased focus on digital transformation, AI and efficiency-led adoption," said the report.
Healthcare and select pharmaceutical stocks offer defensive growth and portfolio stability, while digital and e-commerce themes continue to remain attractive due to strong demand trends, improving balance sheets and long-term compounding potential. However, stock selection remains critical in these segments.
Here are the key takeaways from the report:
Markets end 2025 on firmer ground:
The Nifty closed CY25 up nearly 10%, trading close to record highs after recovering from a prolonged correction that began in late 2024. The phase marked a reset rather than a rally.
2026 expected to be selective, not broad-based:
With valuations stabilising and earnings showing early recovery signs, markets are likely to see steady, stock-specific growth rather than a momentum-driven surge.
Large caps relatively better valued:
The Nifty-50 trades at 21.5x one-year forward P/E, only slightly above its long-term average, while mid- and small-caps continue to command steep valuation premiums.
Broader market excesses cooled in 2025:
After outsized gains in 2023–24, mid-caps delivered ~6% returns in 2025, while small-caps declined ~6%, helping reset expectations.
Global factors weighed on sentiment:
US trade tariffs, geopolitical risks, currency volatility and sustained FII outflows kept Indian equities range-bound for much of the year.
RBI played a stabilising role:
The central bank cut rates by 125 bps since February 2025 and injected durable liquidity through CRR cuts and open market operations.
Macro fundamentals remained strong:
GDP growth stood at 8.2% (Q2 FY26), while CPI inflation eased sharply to 0.71% in November 2025, supporting policy easing.
Policy focus shifted to consumption:
Income-tax rebates, GST simplification and the proposed 8th Pay Commission aim to boost household spending, with impact likely from FY27.
Earnings were the weak link—but improving:
Nifty-50 profit growth stayed muted, rising just 2% YoY in Q2 FY26, though recent upgrades to FY26–27 estimates signal early recovery.
Domestic investors now dominate:
Domestic institutional investor holdings overtook FIIs in Nifty-500 companies in March 2025, supported by strong SIP inflows.
FII selling pressure easing:
While FIIs remained net sellers in 2025 (₹2.31 lakh crore outflows), selling moderated toward year-end, with intermittent buying in December.
Sector preferences for 2026:
Investors favour financials, consumption-linked sectors, industrials, capital goods, IT services and healthcare, with emphasis on balance sheet strength.
Investment approach for 2026:
Focus on quality, large caps and earnings visibility; disciplined investing and selectivity expected to outperform aggressive risk-taking.