Market outlook & portfolio strategy: Where to invest at the current levels?

Amid muted stock market returns in 2025, guided by GST and income tax reforms, along with Trump policies, experts recommend focusing on quality large-caps ahead of Q2Fy26 results.

Stock market outlook 2025: Calendar year 2025 has turned out to be a challenging year for equity investors with benchmark indices – BSE Sensex and NSE Nifty50 – yielding abysmal returns so far this year.

 

The headline gauges for large-cap equity returns have risen 5.1 per cent (Sensex) and 6.5 per cent (Nifty) year-to-date (YTD) in CY25 as investors digested the government’s tax concession-led consumption boost, including a cut in income tax and goods and services tax (GST), along with US President Donald Trump’s tariff and H-1B visa policies.

 

The broader Nifty MidCap and the Nifty SmallCap indices, meanwhile, have returned +2.6 per cent and -2.5per cent, respectively, during the period.

 

With most triggers in the prices, analysts suggest investors park their money in large-caps and rotate funds ahead of the September quarter (Q2FY26) earnings, focussing on domestic-demand linked pockets.

 

“Investors should adopt a balanced and staggered investment strategy by maintaining exposure to quality large-cap names with consistent earnings, while selectively adding small- and mid-caps (SMIDs) that are delivering stronger growth,” said Anil Rego, founder and fund manager at Right Horizons PMS.

 

Holding similar views, Trilok Agarwal, fund manager-equity at Ambit Asset Management said that investors should focus on large-caps in defensive, domestic consumption-oriented sectors, while keeping a cautious approach towards highly-valued sectors and export-heavy business.

 

Notably, the dichotomy in the Indian equity markets is also getting reflected in institutional flows.

 

Domestic institutional investors (DIIs) have pumped in Rs 5.54 trillion so far in 2025, even as foreign institutional investors (FIIs) have dumped equities worth Rs 2.30 trillion.

 

Analysts suggest systematic investment plan (SIPs) and phased allocations are the best way to steer the markets at the current juncture with portfolios tilting toward domestic demand-driven themes while keeping export-sensitive exposures moderate until external clarity improves.

Eye on earnings: Where to invest?

According to analysts, the next big trigger for the equity markets will be the Q2FY26 earnings, which is likely to set the stage for a potential upmove.

 

Motilal Oswal Financial Services, for instance, believes that the worst of earnings cuts is behind and given the cavalry of measures adopted by the government with more reforms to come forth, Indian equities should be supported by earnings floor and better sentiment.

 

“While some market participants are still concerned about further material cuts in earnings forecasts, our analysis reveals that even as the past four quarters have been marked by earnings cuts, the intensity of earnings cuts has actually eased to modest levels and the latest quarterly cuts have been the lowest in the past four quarters,” it said in a report.

 

With the Nifty50 trading at a price-to-earnings (P/E) of 20.6x, versus long-term average of 20.7x, the index has the potential to expand once the favorable effect of all policy measures shows up, likely in the second half of FY26, analysts said.

 

“With Q2 earnings season in focus, strategy should be to adopt a selective and staggered approach. Sectors linked to domestic demand, such as banks, autos, consumer durables, and infrastructure look better placed to benefit from GST cuts and the ongoing capex cycle. Stocks such as HDFC Bank, ICICI Bank, L&T, Maruti Suzuki, and Voltas can be accumulated on dips,” suggested Ajit Mishra, senior vice president for research at Religare Broking.

 

For stability, defensive bets like ITC and select pharma names also merit attention, he added.

 

“On the other hand, IT services majors and mid-tier players are likely to face pressure until there is clarity on the US visa issue, and hence exposure should be trimmed or avoided for now. Maintaining some cash for opportunities around earnings-driven corrections is advisable,” he said.  Anil Rego of Right Horizons PMS, meanwhile, prefers sectors like wealth management and financial services, consumer discretionary, healthcare, and renewable energy from long-term outlook.

 

MOFSL backs Bharti Airtel, ICICI Bank, L&T, M&M, Sun Pharma, Ultratech, Titan, Eternal, BEL, TVS Motors, Tech M, Lodha Developers, and Indian Hotels, Dixon, SRF, Suzlon, Jindal Stainless, Coforge, Supreme Ind, Page Ind, Kaynes, Radico Khaitan, UTI AMC, and Niva Bupa as top large-cap and mid-cap stocks.