Why is Emkay Global constructive on Indian equities? Check why, top picks

With most of the events taking a back seat, the markets have been trading sideways, looking for a direction; Here's what Emkay recommend

The Indian stock market has been on a bumpy road over the past few months, navigating a host of global and domestic factors.

 

On one hand, geopolitical tensions, such as the India-Pakistan war following the Palgham terror attack, and US-China trade tariff negotiations, hit sentiment, while quarterly earnings and institutional investors' activity, somehow, supported the markets. Since lows made in April 2025, the Nifty and Sensex have rallied 11 per cent.

 

With most of the events taking a back seat, the markets have been trading sideways, looking for a direction. Given this, domestic brokerage Emkay Global Financial Services said it remains "constructive" on Indian equities on the back of the following factors: 

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Valuations in "Neutral" territory 

Indian benchmark indices' valuations seem to be in "Neutral" zone as the Nifty is trading at a long-term average (LTA) on 1-year forward price-to-earnings ratio (1YF P/E) while 30 per cent of BSE200 stocks are trading at P/Es that are over 1 standard deviation above its long-term average (1sd over LTA). 

 

Nifty is trading at the last twelve months' price-to-earnings ratio (LTM P/E) of 23.7x as compaed to its 5-year historic average of 24x, while BSE 200 is trading at LTM P/E of 24.5x as compared to 5-year average of 26.3x. 

 

However, the brokerage cautioned that the valuations in large-caps could overshoot if earnings momentum accelerates, especially with strong tailwinds from monetary easing.   

 

Besides, the smallcap-and-midcap indices' valuations seem "comfortable" with no "bubble". 

 

"The sector-wise comparison of large-caps against small-and-midcap indices reflects no material difference in fundamentals or valuations," the brokerage note read.

 

It added: We do not see any "bubble" in the small-and-midcap indices, and high valuations are supported by growth and improved earnings quality.  ALSO READ | What does Chris Wood think about stock markets, defence stocks, US dollar?

Earnings upgrade likely in FY26

An earnings upgrade is likely in the second half of FY26 (H2FY2) as consensus, caught in recency bias, hasn’t fully factored in the delayed benefits of lower interest rates and soft commodity prices which could produce margin surprises across sectors.

 

In FY26, according to Emkay's analysis, 61 per cent of companies are estimated to report higher earnings per share growth (EPSg) than in FY25 and this share could rise further if upgrades materialise.

 

Besides, the Reserve Bank of India (RBI) is expected to cut policy rates by as much as 125 basis points (bps) in the current financial year (FY26), according to a SBI Research report. 

Global risks de-escalating

The US-China trade deal, albeit temporary, is an indicator that the trade war should be soft-landed by a series of bilateral deals, believes Emkay. It expects the overall impact of the trade deal to not be much different or extreme than seen in the last 8-10 years.

 

Last week, the US and China jointly declared a 90-day pause on a portion of their existing tariffs. China agreed to lower tariffs on US goods from 125 per cent to 10 per cent, and the US affirmed to reduce tariffs on Chinese goods from 145 per cent to 30 per cent.

 

Additionally, the US credit rating downgrade could drive a short risk-off trade, which would hurt India, but it should dissipate soon. 

 

Recently, Moody's Ratings lowered the United States (US) credit rating from a gold-standard "Aaa" to "Aa1" but said the country "retains exceptional credit strengths such as the size, resilience, and dynamism of its economy and the role of the US dollar as a global reserve currency.

 

"In the medium term, the US Dollar index (DXY) is likely to remain weak and the resultant emerging market flows benefit India, especially with earnings momentum returning," the brokerage noted. 

Where to invest in the current market? 

Emkay is "Overweight" on smallcap-and-midcap indices-heavy sectors like discretionary over large-cap dominated sectors like financials and staples. 

 

They have added Bikaji Foods, JK Cement, Sonata Software, and Motilal Oswal; and retained Escorts, Metropolis Healthcare, PayTM, and StoveKraft. 

 

On the other hand, are "Underweight" on large-cap-dominated sectors like financials and staples, where they see a severe growth-valuation mismatch.