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Good! Year is coming to an end

CY2025 turned out to be a so-so year for Indian markets with limited returns for investors in general. However, there was wide variance in performance across caps, sectors and stocks. We expect CY2026 to be a better year due to (1) better earnings outlook, (2) improved domestic consumption demand and (3) likely stable macro.

Good! Year is coming to an end

The Indian market delivered mediocre returns in CY2025 on both absolute and relative (see Exhibits 1-3) basis despite (1) large government support (income tax and GST rate cuts), (2) strong domestic inflows (see Exhibits 4-5) and (3) sharp decline in the INR (see Exhibit 6). The Indian market has been constrained by (1) high valuations (see Exhibits 7-12), (2) earnings downgrades and weak growth in earnings in FY2025-26 (see Exhibits 13-14), (3) low interest among FPIs given better relative opportunities elsewhere (see Exhibit 15) and (4) no exposure to the AI theme, a key driver of several markets in 2HCY25.

Large-caps did better than mid-caps and small-caps

The performance of the market was in direct proportion to the market cap. of indices and stocks. The large-cap index delivered decent return (9% CYTD based on the Nifty-50 Index), mid-cap. index delivered modest return (4% CYTD based on the Nifty Midcap 100 Index) and small-cap. index delivered negative return ((-)9% based on the Nifty Smallcap 100 Index); see Exhibits 16-18.

Automobiles, financials and metals did better than other sectors

The performance of the market was quite varied by sectors (see Exhibit 19) with automobiles (domestic) and financials doing well across caps, ownership (private or PSU banks) and type (banks, capital markets, insurance, NBFCs) but most other sectors struggling. The strong performance of automobiles reflected a serendipitous and large cut in GST tax rates that led to a sharp re-rating in their multiples. The strong performance of financials was driven by their inexpensive valuations for most of the year, which reflected the market’s concerns around a sharp decline in NIMs in the case of banks, myriad concerns about insurance stocks and a possible increase in credit costs of NBFCs.

Good year may be starting

We expect a somewhat better CY2026 with (1) strong recovery in earnings of the market (see Exhibit 20); we are more confident about decent earnings recovery in most sectors although we see downside risks to margins in the case of automobiles and consumer staples sectors (see Exhibits 21-22), (2) improved domestic consumption demand on the back of GST and income tax rate cuts (see Exhibits 23-24) and lower interest rates (see Exhibit 25) and (3) a likely better macro on likely conclusion of the India-US trade deal after months of protracted negotiations, which could result in a recovery in the value of the INR; the INR has been hit by a sudden and sharp deterioration in India’s trade balance (see Exhibits 26-27) despite its reasonable fundamentals (see Exhibits 28-29).

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