India vs global markets: Will 2026 reverse AI-led underperformance?

Will Indian markets outperform global markets in 2026? Analysts weigh earnings recovery, valuations, AI risks to forecast Indian equities outlook for the new year

Indian stock market outlook 2026

 

India vs global markets in 2026: After a year of cautious consolidation and global underperformance, the Indian stock market is entering calendar year 2026 with renewed optimism.

 

Though a combination of mean reversion and robust domestic reforms could see India regain its status as a preferred destination for growth capital in the new year, analysts cautioned that India’s outperformance vis-a-vis global markets rests on two key factors: a cooling of the global Artificial Intelligence (AI) frenzy, and a sharp pick-up in earnings growth.

 

Notably, domestic equities underperformed emerging markets by nearly 25 per cent and global equities by around 15 per cent in calendar year 2025 as earnings growth of India Inc collapsed from over 20 per cent CAGR between 2020-2024 to 5-6 per cent in 2025.  

 

 

Till December 26, Indian benchmarks – NSE Nifty and BSE Sensex – yielded 10.1 per cent and 8.8 per cent returns, respectively.

 

By comparison, tech-heavy Nasdaq Composite in the US jumped 22.2 per cent during the period, while broader S&P500 added 17.8 per cent, as per Bloomberg data.

 

In Asia, and Europe, South Korea's Kospi zoomed 72.1 per cent, Hong Kong's Hang Seng 28.7 per cent, Japan's Nikkei 27.2 per cent, China's Shanghai Composite 18.3 per cent, Germany's DAX 22.3 per cent, and Eurozone's Euro Stoxx 17.4 per cent so far in calendar year 2025.   ALSO READ | Large, mid or small caps? Here's 2026 playbook post SMIDs' underperformance

Reforms and Consumption

Fundamentally, analysts believe bulls may return to India's Dalal Street in 2026 focussing on a strengthening domestic economy. They expect the government’s reforms, including the restructuring of the goods and services tax (GST), a reduction in income tax, and the implementation of the 8th Pay Commission, to provide significant tailwinds to discretionary spending over the next 12 months.

 

"The Reserve Bank of India (RBI), too, remains highly supportive of growth with inflation at historical lows. Further, with the PMI at 59.2 - one of the strongest globally – manufacturing activity in India remains healthy. These drivers should aid a meaningful pickup in corporate earnings and renew private capex," Vikas Khemani, founder and chief investment offiver (CIO) of Carnelian Asset Management & Advisors, said.  

 

He pegs Nifty50's 2026 target at 28,000-30,000 range.

 

Echoing similar sentiment, Rupen Rajguru, who is the managing director senior advisor, and head of equity investment and strategy at Julius Baer India, said India’s underperformance vs global markets may reverse in 2026 with Nifty earnings projected to grow around 17 per cent in financial year 2026-27 (FY27). 

 

"Growth in FY27 earnings will be led by Financials, Discretionary spends, Telecom, Non-ferrous metals, IT, and Staples," he said.  ALSO READ | Stock Market outlook 2026: Earnings, Budget, FII flow, trade deal to drive stocks

Reversing the 'AI Underperformance'

Another significant drag on Indian equities in 2025, as per analysts, was the global "AI playbook" where India was considered a loser in the overall ecosystem.

 

However, as investors digest AI-related capex and assess the return on investments (ROIs) done by hyper-scalers, big-tech global companies may take a breather in CY26. This, analysts said, may aid India to reverse its underperformance.

 

"If the liquidity concentration in US mega-cap tech and AI stocks continues, India may perform in-line with global markets rather than decoupling significantly. However, if the 'AI euphoria' stabilises and capital begins to rotate out of crowded US tech trades, India stands as the best alternative for growth capital," noted Prabhakar Kudva, director and principal officer - Portfolio Management Service, Samvitti Capital.  ALSO READ | 2026 investment strategy: PSU banks, IT 'cheap'; defence stocks 'expensive'

Risks to the Recovery

That said, the uptrend in Indian equities in 2026 may not be as linear as perceived to be. Analysts caution that despite most headwinds priced-in and valuations near historical averages, risks remain for the Indian markets.

 

Pramod Gubbi, co-founder at Marcellus Investment Managers, highlights that large swathes of the global markets, outside of AI bets, didn’t witness any meaningful rally.

 

"So in a mean reversion trade in the event of an AI rally stalling, global markets, such as the US and European small and mid caps and industrials, could still do well," he said. 

 

Further, while India, he believes, may also benefit from an AI bubble bust, he said valuations still remain elevated in absolute terms amidst tepid earnings growth. 

 

"For a sustained outperformance in India, earnings need to recover sharply. My sense is India will likely perform in-line with non-AI stocks globally in the event of an AI bubble bust. Should the AI rally sustain, India is likely to continue to underperform," he warned.

 

Geopolitical tensions, tariff uncertainties, and absence of foreign inflows may also stall the rally.