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The global barbell – heavy loads, uneven lifts:

If global uncertainty were to have a benchmark, the past two years would arguably stand out as one of the most volatile periods for markets in history. On one hand, global markets are grappling with multiple, overlapping headwinds, including geopolitical tensions across several fronts, persistently elevated energy prices, supply shocks, rising global debt, inflationary pressures, higher bond yields, and the onset of a global rate-hike cycle. On the other hand, the AI-led technology boom, along with the associated infrastructure and capex cycle, is driving a disproportionate share of global capital flows and market outperformance, largely at the expense of other major sectors and economies

The great disconnect domestic fundamentals vs. foreign outflows:

Global developments have had a significant bearing on Indian market sentiment, weighing on an otherwise resilient macroeconomic backdrop. India’s economy and financial markets are increasingly caught between two contrasting forces. On one hand, healthy high-frequency indicators – including GDP growth, IIP, GST collections, alltime high forex reserves, strong credit growth, and auto and cement volumes – all point to buoyant economic activity. Alongside a resilient corporate earnings trajectory, strong domestic liquidity and a vibrant primary market and rich deal pipeline further reinforce the constructive structural outlook for Indian equities. Conversely, persistent FII outflows from secondary markets and subdued foreign investor sentiment continue to act as a key burden.

Large-cap drag vs. broader market resilience:

Amid two years of heightened volatility, Indian markets have remained rangebound and undergone a significant time and price correction, with the Nifty-50, mid- and small-cap indices declining 14%, 2%, and 3%, respectively, from their Sep’24 peaks.

Earnings preview 2QFY27: Expect strong broad-based earnings

* We expect strong broad-based earnings growth, with aggregate earnings for the MOFSL Universe surging 22% YoY (the highest growth in 11-quarters) and exOMCs earnings to grow 24% (the highest in 12-quarters).

* Earnings are likely to be anchored by Financials, led by Banks (Private & PSU), NBFCs, Metals, O&G (ex-OMC), and Telecom.

* The MOFSL large-/mid-/small-cap universes are likely to register PAT growth of 23%/11%/29% YoY. Ex-OMCs large- and mid-cap universes are likely to register stronger PAT growth of 25% and 20%, respectively.

* Nifty-50 aggregate earnings are expected to grow 27% YoY (the highest in 17 quarters) in 2QFY27.

A series of heavy lifts tests India’s equity sentiment

* The relatively effortless climb enjoyed by Indian equities until 2024 has given way to a heavier lift, as a growing weight of sentiment-driven and fundamental pressures has tested market resilience over the past two years. Challenging global macroeconomic conditions, persistent geopolitical tensions, trade and tariff disruptions, elevated energy prices, rising bond yields, inflation concerns, and the onset of a rate-hike cycle have weighed heavily on investor sentiment. The lack of respite in the West Asia conflict offers limited visibility on crude prices cooling toward pre-war levels, keeping inflationary and macroeconomic risks elevated in the near term.

* The spike in global bond yields to a two-decade high is particularly concerning, as tighter financial conditions and the increasing relative attractiveness of developed markets could divert capital flows away from emerging markets.

Valuations well below the 2024 peak

* India’s ongoing market consolidation, alongside continued earnings recovery from FY25 lows, has led to a sustained cooling in valuations from the highs seen in 2024. Large- and mid-caps have witnessed the steepest valuation corrections of 31% and 36%, respectively, from their respective peaks, while small-caps have corrected 7% on a 12-month forward P/E basis. The Nifty-50 and mid-cap indices now trade at 18% and 4% below their respective LPAs, while small-caps remain 24% above their LPA, compared with premiums of 20%, 50%, and 47%, respectively, in Sep’24.

* The sharp rally in global markets, coupled with weakness in Indian benchmark indices, has further narrowed India’s valuation premium over EMs to a record low of 35% in Sep’26, well below its long-term average of 72% and CY22 peak of 147%.

* The sharp valuation correction from their respective peaks, both domestically and globally, has meaningfully eased concerns about elevated valuations, improving the attractiveness of Indian equities compared to levels seen two years ago.

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