Indian equity markets are entering 2026 with a fundamentally different character, shifting from the easy liquidity-driven gains of recent years to an environment where earnings quality and balance-sheet strength take precedence. After a robust 2025 marked by record highs, sharp sectoral reratings, and blockbuster IPO activity, investors now face a market demanding greater discipline and stock-specific conviction.

Nikhil Khandelwal, Managing Director at Systematix Group, believes the coming year will reward bottom-up stock picking over broad market exposure, as markets transition firmly from liquidity-led rallies to earnings-driven returns.

Market Foundation Remains Strong Despite Valuation Concerns

Indian equities enter 2026 on solid footing, supported by healthy domestic growth, improving corporate balance sheets, and sustained retail participation through systematic investment plans (SIPs). While valuations in certain market segments appear elevated, earnings visibility across most industries remains robust.

"The market is likely to stay earnings-driven rather than liquidity-led, which is a healthy sign," Khandelwal notes. "If corporate earnings deliver as expected and domestic flows remain steady, equities can continue to generate reasonable, albeit selective, returns."

Sectoral Preferences Favor Quality and Earnings Visibility

For 2026, Khandelwal expects a stock-picker's market favoring sectors with clear earnings visibility and strong balance sheets. Quality financials and banks remain preferred picks, supported by credit recovery and stable asset quality trends.

Capital goods and industrials linked to the private capital expenditure cycle appear well-positioned, while select exporters and pharmaceutical companies remain attractive due to stable margins and improved demand from China+1 and Europe+1 themes. Additionally, sustainability-focused themes around circularity, recycling, and green manufacturing offer long-term opportunities.

Caution Advised for Stretched Segments

Several segments that experienced sharp rerating in 2025 now appear stretched with limited room for disappointment. Defence companies, private non-banking financial companies (NBFCs), and road infrastructure firms, where stock prices moved faster than earnings growth, could face consolidation.

"Rather than a broad exit, investors may be better off trimming exposure and shifting towards companies with stronger earnings visibility, balance sheets, and cash-flow discipline," Khandelwal advises.

Precious Metals and Currency Outlook

Gold and silver delivered strong outperformance in 2025 driven by global uncertainty, currency volatility, and shifting interest-rate expectations. For 2026, precious metals are likely to remain relevant, though returns may be more measured after the previous year's sharp rally.

The rupee's weakness, crossing the 90 mark against the US dollar, has been driven largely by global factors including foreign portfolio outflows and external trade pressures. However, Khandelwal emphasizes that India's macro fundamentals remain relatively stable, with domestic liquidity providing a counterbalance.

Investment Strategy for 30-40 Age Group

For investors in the 30-40 age bracket planning to invest ₹10 lakh in 2026, Khandelwal recommends a growth-focused approach with sensible risk management:

Key Market Triggers and Learnings

Earnings growth will remain the most critical trigger for markets in 2026, alongside interest rate trends and global liquidity conditions. Domestically, consumption patterns, private sector capital expenditure progress, and policy stability will be key determinants.

Khandelwal's key takeaway from 2025 emphasizes that markets reward earnings and balance-sheet strength far more than narratives. "Disciplined asset allocation and staying invested through volatility, especially via SIPs, proved more effective than trying to time short-term market moves," he concludes.

The transition to an earnings-driven market environment signals a maturing of Indian equity markets, where fundamental analysis and stock selection will increasingly determine investment success over broad-based thematic plays.

Market participants are increasingly debating whether equities can regain leadership in the coming financial year, following a period marked by sharp cross-asset movements and persistent investor interest in precious metals. With focus shifting between gold, silver, and stocks, investors are questioning whether a multi-asset approach will continue or if equities are positioned for stronger performance ahead.

Positive FY27 Outlook Driven by Improving Macros

Manish Sonthalia from Emkay Investment Managers believes the outlook for Indian markets is improving meaningfully, with FY27 expected to mark a clear step up from the previous year. "FY27 should be better than FY26 for sure on the back of better macros as far as India is concerned," he stated, highlighting several supportive factors.

Sonthalia expects FY27 to outperform FY26 with 12-13% earnings growth, driven by low inflation, reduced rates, and improving macros. He sees opportunities in rate-sensitive sectors and the pharmaceutical CDMO space.

The broader setup appears supportive, though markets are awaiting a key global trigger. Sonthalia noted that "market is waiting with bated breath as to see the light of the day for the US trade deal," suggesting that markets may wait until March for clarity on this potential catalyst.

Earnings Growth and Sectoral Outlook

Sonthalia expects earnings growth to regain momentum, projecting FY27 growth at 12-13% with potential upside of around 15% by year-end. His sectoral outlook highlights a mix of financials, industrials, and defensives as key contributors.

Strong Performance Expected

• Banks: Decent earnings growth anticipated
• IT: Projected growth of 6-7%
• Capital goods: Positive outlook
• NBFCs: Expected to perform well
• Healthcare: Strong performance ahead

Sectors Facing Headwinds

• Metals: High base effect concerns
• Oil and Gas: Challenging comparisons

Rate-Sensitive Sectors Positioned to Benefit

In the low-inflation environment, rate-sensitive segments could emerge as significant beneficiaries. Sonthalia highlighted several areas poised for growth:

Consumption-linked segments could benefit from multiple policy tailwinds, including "rate cuts, GST cuts, income tax cuts, and one lakh crore incentive," all contributing to consumption growth.

Valuation Concerns in Capital-Intensive Sectors

Despite growth visibility in infrastructure-related areas, Sonthalia continues to flag valuation concerns in capital-intensive sectors. "Valuations are still very elevated because some of these favoured sectors are discounting probably FY28-29 and no room for error," he cautioned.

While growth visibility exists in roads, railways, defense, and capital goods, much of the expected performance appears already priced in, potentially limiting near-term returns.

Pharmaceutical Sector Opportunities

Sonthalia remains constructive on pharmaceuticals, particularly if generics remain outside tariff discussions. He sees significant promise in the CDMO (Contract Development and Manufacturing Organization) segment, which has undergone sharp correction.

"One space which has seen significant correction is basically the CDMO space... this is one space which is very-very exciting," Sonthalia emphasized, highlighting structural opportunities from global supply chain shifts.

Investment Strategy and Stock Selection

As leadership within sectors shifts, Sonthalia underscored the growing importance of bottom-up stock selection. He stressed that "you cannot paint everything with the same brush saying that everything is very expensive and the mid and smallcap universe is to be avoided totally."

The investment manager believes valuations have corrected meaningfully in pockets, creating selective opportunities for investors who focus on individual stock fundamentals rather than broad market generalizations.

Overall, Sonthalia believes FY27 could reward disciplined investors who focus on valuations, sectoral tailwinds, and bottom-up stock selection rather than chasing crowded investment themes.