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The Indian market continues to be in the thrall of domestic retail investors and retail investors seem to be in thrall of the market. This ‘circular’ relationship has resulted in (1) large disconnect between rich valuations and modest fundamentals and (2) quixotic valuations in parts of the market. 1QFY26 was another middling quarter, continuing the trend of the past few.

Investors and markets—circular tango

The Indian market continues to be largely disconnected from fundamentals with (1) high valuations across sectors and companies being supported by the (2) price-agnostic purchases of retail investors. In our view, the market is buoyed by the strong sentiment among retail investors, who are, in turn, appear to be enthralled by the market, notwithstanding (1) rich valuations of the market, (2) earnings downgrades and (3) poor 12-month trailing returns.

Nothing fundamental about it

We find the valuations of the Indian market and for most sectors and stocks on the higher side, despite the lengthy period of time correction in the market. The high valuations in several sectors are hard to reconcile with (1) modest-tomoderate near-term growth in profits of certain domestic sectors (autos, consumer staples), (2) high near-term uncertainty on the profits of some of the export and global sectors (IT services), (3) large medium-term disruption risks to profitability and volumes in many sectors and (4) earnings downgrades in most sectors. We expect FY2026E and FY2027E net profits of the Nifty-50 Index to grow 9.6% and 17.5% versus 12.1% and 15.4% at the start of FY2026.

A good macro can help that much only

We are not seeing any signs of a meaningful acceleration in growth despite a healthy macroeconomic position that would result in earnings upgrades. We expect a moderate pickup in consumption demand driven by (1) income tax cuts in the FY2026 budget and potential GST cuts, (2) 100 bps rate cut by the RBI in 1HCY25, (3) lower inflation and (4) modest-to-moderate increase in household income. However, we expect a slowdown in investment demand due to (1) a slowdown in central government capex and (2) a likely pullback in household investment in residential real estate due to sharp increase in real estate prices. Exports will continue to languish in the current global setup of weak consumer and corporate sentiment in most of the major economies

Another quarter went by on hope

1QFY26 net income of the Nifty-50 Index grew 7.5%, versus our expectation of 4% growth and net income of the KIE Coverage Universe grew 10%, versus our expectation of 9.9% increase. 1QFY26 EBITDA of the Nifty-50 Index increased 4.5% versus our expectation of 5.5% growth and EBITDA of the KIE Coverage Universe grew 9.1%, versus our expectation of 12% increase. We expect net income and EBITDA of the Nifty-50 Index to grow 9.6% and 13% in FY2026 versus 6.5% and 4.5% in FY2025.

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