CLSA expects India's equity markets to deliver moderate returns in 2026, with the brokerage's strategist highlighting valuation constraints and reduced policy momentum as key factors shaping market performance.

Market Outlook and Return Expectations

Vikash Kumar Jain, India Strategist and Head of India Research at CLSA, said high single-digit gains on the Nifty 50 represent the best-case scenario for 2026. He expects a gradual de-rating phase where valuations compress while earnings grow, with returns potentially lagging earnings growth.

Jain noted that India's reduced valuation premium following 2025 underperformance has made the market more acceptable to global investors. However, he emphasized that absolute valuations do not leave significant room for re-rating, though India could still serve as a portfolio hedge during global uncertainty periods.

Sector Preferences and Investment Strategy

CLSA has increased its focus on consumption sectors, adding retail and quick commerce names after recent market consolidation. The brokerage maintains an overweight stance on discretionary spending, staples, and select automotive companies. Real estate represents another preferred sector, supported by the impact of lower-for-longer interest rates.

Jain said these sectors could benefit even during phases where market returns lag earnings growth, providing defensive characteristics while maintaining growth potential.

Policy Environment and Fiscal Outlook

The strategist highlighted that 2026 will differ significantly from 2025 due to fewer policy announcements and limited room for fiscal and monetary action. Major policy steps including income tax cuts, goods and services tax changes, and rate cuts were largely announced in 2025.

For 2026, the focus is expected to shift towards fiscal consolidation and assessing the impact of previously implemented measures. Jain said the market should not expect significant policy-driven catalysts, stating "We are not expecting any fireworks."

Energy Sector Outlook

CLSA expects crude oil prices to move higher as 2026 progresses, with Jain forecasting prices in the range of $70 per barrel and above. Despite crude oil markets appearing oversupplied on paper, he cited geopolitical risks as factors that could quickly change the supply-demand balance.

The brokerage prefers upstream energy companies over downstream oil marketing firms, pointing to names that benefit directly from higher crude prices. Jain emphasized that potential supply disruptions linked to Iran, Russia, and geopolitical actions could drive price recovery despite current oversupply conditions.

The Indian IT sector faced significant selling pressure on Monday, with the Nifty IT index declining nearly 2% amid concerns raised by brokerage firm CLSA ahead of the third quarter earnings season. The sector emerged as the biggest laggard for Nifty 50, contributing negatively 30 points to the index's decline as all stocks in the Nifty IT index traded with cuts.

Sharp Declines Led by Major IT Players

Infosys and HCLTech bore the brunt of the selling pressure, with both stocks falling more than 3% during Monday's trading session. The broader sector weakness extended to other major players including TCS, Tech Mahindra, and Persistent Systems, all of which faced significant drawdowns.

CLSA's Cautious Stance Weighs on Sentiment

The market decline follows CLSA's recent note expressing caution on the IT sector heading into the earnings season. The brokerage firm reduced constant currency growth estimates for large-cap companies while downgrading key stocks. HCLTech was downgraded to 'Hold' from 'Outperform' with analysts noting that superior growth and strong seasonality appear already priced into the stock. Tech Mahindra was downgraded to 'Outperform' from 'High Conviction Outperform' due to muted EPS delivery expectations.

Despite the cautious outlook, CLSA maintained bullish projections for mid-cap players, identifying Persistent Systems, Coforge, and LTIMindtree as stocks with significant upside potential of 45.6%, 45.6%, and 15.5% respectively.

AI Competition Concerns Add to Sector Pressure

A key factor contributing to the sector's weakness stems from recent AI-related announcements in Japan and other Asian countries, raising fears that Indian IT may be falling behind in the artificial intelligence race. While Indian IT companies are rapidly pivoting towards AI, the sector still lags behind most countries and is often viewed as an anti-AI hedge by investors.

Market Outlook Amid Earnings Season

The technical bearish sentiment on Nifty IT reflects broader concerns about the sector's competitive positioning and growth prospects. Despite CLSA raising target prices for eight IT stocks, the combination of reduced growth estimates for large-cap players and intensifying AI competition has created headwinds for the sector as it approaches the third quarter earnings announcements.