Worst may be over: Earnings clouds clear, Dalal Street poised for comeback

After a year of relentless downgrades, the tide seems to be turning for India Inc. Motilal Oswal's latest strategy report reveals that earnings cut intensity has eased sharply

After a year of gloom, India’s stock markets may finally be on the verge of a turnaround. The storm of earnings downgrades that weighed on investor sentiment is showing signs of easing, and with policymakers rolling out aggressive support measures, the stage looks set for a potential rally, according to a report by brokerage Motilal Oswal.

For four straight quarters, analysts kept slashing profit forecasts. But the tide is turning. In the June quarter review (1QFY26), aggregate profit-after-tax (PAT) estimates for the MOFSL universe were trimmed by just 2% for FY26 and 1% for FY27 — the lowest cuts in a year. In fact, mid-cap companies saw earnings upgrades, while large-caps held steady. Only small-caps continued to struggle.

 

“Much of the pain is behind us,” said analysts at Motilal Oswal Financial Services (MOFSL). “The risk of big cuts is now low, unless we see a fresh global shock.”

Policy cavalry rides in

If earnings revisions are calming nerves, policy moves are stoking optimism. The RBI has slashed the repo rate by 100 basis points to 5.5% and is set to cut CRR by 150 basis points, flooding the system with liquidity. At the same time, tax and GST cuts are expected to lift disposable incomes just ahead of the festive season.

A new “GST 2.0” could act as the real game-changer. By lowering rates on everyday items, it’s expected to unleash a fresh consumption cycle. “Think of it as a flywheel — lower retail prices drive higher demand, which drives volumes, which then boost margins through operating leverage,” explained the report.

Winners and laggards

Sectors like automobiles, cement, insurance, consumer staples, and telecom are already seeing improved earnings trends. Technology, metals, PSU banks, and retail are still in the red zone — though private banks could see a rebound in the second half of FY26 as lower rates kick in.

Valuations give hope

The Nifty currently trades at 20.6 times one-year forward earnings, almost bang in line with its long-period average of 20.7x. And with Indian equities down 8% over the past year, compared to double-digit gains for global peers (MSCI EM +16%, S&P 500 +15%), the underperformance may finally set the stage for a catch-up rally.

MOFSL is projecting PAT growth of 13% for its coverage universe and 10% for the Nifty in FY26, followed by a 15%/13% CAGR over FY25–27.

Stock ideas for a revival trade

The brokerage is betting on Bharti Airtel, ICICI Bank, L&T, M&M, Sun Pharma, Ultratech, Titan, BEL, TVS Motors, Tech Mahindra, Lodha Developers, and Indian Hotels among large-caps. In mid-caps, favorites include Dixon, SRF, Suzlon, Jindal Stainless, Coforge, Supreme Industries, Page Industries, Kaynes, Radico Khaitan, UTI AMC, and Niva Bupa.

The bottom line

After a year of cuts, caution, and underperformance, Indian markets may finally be finding their footing. With earnings stabilizing, policy tailwinds blowing, and valuations supportive, the second half of FY26 could mark the beginning of a brighter chapter for investors.

Key highlights:

Downgrades bottoming out: FY26 PAT estimates cut by just 2% in 1QFY26 vs. 6%/3%/4% in the preceding quarters; FY27 estimates have even seen marginal upgrades.

Macro boost: RBI’s 100bps repo rate cut, 150bps CRR reduction, and GST 2.0 rate rationalisation are set to bolster liquidity, incomes, and demand.

Policymakers in ‘whatever-it-takes’ mode: Despite geopolitical distractions, the government, RBI, and regulators are acting in unison with a proactive stance to revive the economy. Ample liquidity, lower taxes, and rural demand recovery show confidence in India’s resilience and signal the potential for sustained growth.

Valuations supportive: Nifty’s 12-month forward PE stands at 20.6x, in line with historical averages, leaving room for re-rating as earnings visibility improves.

Growth outlook: MOFSL universe PAT growth is projected at 13% in FY26 and 15% CAGR over FY25–27, signalling an inflection point in the earnings cycle.

Global alignment: After lagging peers (Nifty down 8% YoY vs +16%/+15% for MSCI EM/S&P 500), India is set for mean reversion as domestic reforms and consumption momentum gather pace.

Investor sentiment lift: Liquidity surplus, rural demand revival, and stronger corporate balance sheets are likely to underpin a sustained rally into 2HFY26.