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According to smallcase managers, the Global trade tensions, US tariffs, geopolitical uncertainty remains a key risk for Indian capital market. However, they expect equities to outperform other asset classes in FY26, supported by favorable valuations and a strong growth outlook.

India's capital markets are projected to grow steadily in FY26, supported by expected GDP growth of 6.2–6.5% and strong domestic demand. The Nifty 50 is anticipated to deliver 12%-15% returns, with EPS estimates around ?1,160. While, Foreign Portfolio Investors (FPI) have shown renewed confidence, injecting over $4 billion in recent sessions.

Shailesh Saraf, smallcase Manager and Founder, Value Stocks said, “As of May 18, 2025, a total of 878 companies have reported their earnings, with a 10% year-on-year growth in Q4FY25. Despite a modest 5.79% year-on-year growth for FY25—significantly lower than the 35.1% growth recorded in FY24, the market sentiment has improved, reflected in FII net inflows of ?16,757 crore in FY26 so far, alongside an 8% return from the Nifty 50 and a 10% gain in the Smallcap 100 index."

Robin Arya, smallcase Manager and Founder, GoalFi said, “A cautiously optimistic outlook for FY26 is justified. Key positives include a stable government, the prospect of lower interest rates, and potential earnings rebound. While global trade tensions remain a concern and could pose intermittent risks to market momentum, corporate earnings continue to show resilience particularly in the banking, auto, and infrastructure sectors. We believe this year will be of consolidation with earnings improvement in companies and theme-based investing will be prevalent.”

Dr. Prachi Deuskar, smallcase Manager and Co-Founder, Lotusdew said, In Q4FY25, India's domestic demand recovery gained momentum, driven by strong rural consumption, favourable crop yields, and supportive government initiatives. Corporate margins improved, aided by declining input costs in metals, energy, and chemicals, as well as a sharper focus on operational efficiency. With inflation largely under control, the macroeconomic environment remained stable. However, challenges persist—a weak INR has raised import costs, and urban consumption is showing signs of a broad-based slowdown. Trade Policy & Global Risks, such as U.S. tariff risks (~26%), could affect 12–15% of India's $450B exports. However, overall equities are expected to outperform other asset classes. For investors with a longer horizon and a stronger risk appetite, increasing allocation to high-quality small caps can pay off as markets continue to climb.”

FY~25 Earnings Interim Review:

smallcase Managers note that earnings for Q4FY25 have been stronger than anticipated driven by strong sales and profit growth. However, it highlights that forward-looking earnings revisions are still showing signs of weakness, with more downgrades than upgrades more so as Corporate investment growth remains sluggish.

The market has bounced back significantly over the past two months, fully reversing its year-todate decline. So far, Nifty stocks have delivered the following YoY growth: Sales: 9% (vs. estimate of 6%), EBITDA: 6% (vs. estimate of 4%), PBT: 10% (vs. estimate of 10%), PAT: 4% (vs. estimate of 2%).

Sectoral Outlook for FY~26:

smallcase managers believe that with inflation below 4%, the real interest rate has turned significantly positive, strengthening the case for policy easing. The market has effectively priced in a cut, even if it's not yet formally announced. Lower borrowing costs can spur corporate investment and consumer spending, benefiting sectors like banking, real estate, and autos. Equity markets may rally in anticipation of improved earnings and liquidity.

Though, smallcase Managers do note that global trade tensions persist, particularly with Trump’s reciprocal tariffs potentially rattling India’s export-oriented sectors and overall market sentiment. They believe sectors like electronics, pharma, auto & auto components and textiles will be in focus till the tariff wars wane. They continue to remain positive about sectors such as Infrastructure, BFSI (incl. PSU Banks), Electronics/EMS, Automobiles/Auto Anc, Consumer/FMCG, Renewable Energy, while remaining cautious about IT, Pharma, Chemicals, Capital Goods, Real Estate

According to managers top sectors to watch out are: -

Defence Sector: India’s defence sector is set to grow robustly in FY26, backed by a projected capex outlay of INR 1.8 trillion and a USD130 billion opportunity over FY25–29, with ~7–8% annual growth. Focus areas include Air Force and Navy modernisation through programs like LCA Mk-IA (97 units, INR 650bn) and P-75I submarines (6 units, INR 600bn). Defence electronics is projected to grow at 10–14% CAGR, outpacing the broader sector. Private players are expected to post 25–40% EPS CAGR, versus 15–18% for DPSUs. Key watchpoints include execution risks for HAL and geopolitical supply chain pressures.

Consumer sector: Expects India’s consumer sector to rebound strongly in FY26 with ~13% earnings growth, following a muted FY25 where median EPS growth was just ~1%. Key drivers include easing input costs in H2FY26, rural demand recovery supported by a normal monsoon and rising real wages, and potential fiscal boosts like the 8th Pay Commission (?4 lakh crore impact) and personal income tax cuts. The sector has corrected ~35% since October 2024, making valuations attractive. Categories such as packaged foods, QSR, and personal care are poised to benefit most.

Tourism Sector: The hospitality sector is currently in an upcycle, driven by strong domestic demand, limited supply addition, and favorable demographics. Key demand drivers include strong domestic business travel, mega-events, and a strong wedding season. This demand trend is expected to continue in the mid- to long term, supported by India's economic growth and rising disposable incomes. The outlook for FY '26 is robust, with confidence in delivering double-digit revenue growth.

Capital Markets: The Indian capital market sector experienced a surge in activity in FY2025, driven by a record number of IPOs, 318 IPOs with 239 SME IPOs. Increased capital formation, reflecting strong market fundamentals which supported market stability and growth. While there might be some moderation of macro tailwinds in the near term, the overall outlook remains optimistic. The sector is expected to continue growing, with a focus on deepening and broadening market participation, enhancing market infrastructure, and investor education. The managers expect wealth management companies and AMCs to do well this year as well.

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