Ambit Capital anticipates 2026 will be characterised by moderation rather than acceleration, as normalising earnings growth and rising market concentration are expected to result in muted headline returns and increased preference for large-cap quality stocks.

Market Outlook for 2026

Nitin Bhasin, Head of Institutional Equities at Ambit, and Bharat Arora, Lead Strategy at Ambit Capital, believe 2026 represents a continuation of moderation following the strong rally that pushed Indian equities to record highs. Their analysis indicates earnings growth persistence is rare, with significant cuts already made to earnings per share estimates for the coming years.

Rising market concentration historically precedes slower GDP and EPS growth, pointing to weak breadth and lower median stock returns. The GRIP framework signals caution as growth normalises, risk premiums reverse, and positioning crowds into quality segments.

Sector Leadership and Investment Strategy

The investment house expects 2026 leadership to be narrow and quality-driven. As earnings growth normalises and market concentration rises, FMCG, Healthcare, and IT sectors are positioned to lead the market. These sectors offer reasonable earnings visibility, balance-sheet strength, and have historically outperformed during periods of slowing growth and rising concentration.

Nifty IT's underperformance relative to Nifty has reached historical troughs, with empirical evidence suggesting approximately 7.00% relative outperformance for IT over the next 12 months. The global CEO confidence index declined to one of its lowest levels, serving as a contrarian indicator with IT delivering outsized returns post-trough.

Currency and Commodity Outlook

The rupee's recent weakness, surpassing the 90 mark against the USD, stems from delayed US-India trade deals, widening trade deficits due to gold imports and weak exports, and reduced foreign investment inflows. Ambit expects further depreciation of 1.00% to 1.20% in line with historical trends, potentially reaching ₹91.20 per USD by March 2026.

For precious metals, regulatory changes permitting NPS funds to invest in gold and silver ETFs could structurally raise domestic institutional allocations. However, return visibility remains lower relative to financial assets, though gold can serve as a portfolio hedge amid market volatility.

Risk Factors and Profit Booking

Investors should consider reducing exposure to themes that experienced significant runs in recent periods based on valuation re-rating rather than earnings growth. This includes small and mid-cap cyclicals such as Capital Goods, Metals, Auto ancillaries, and Defence sectors, where prices have moved well ahead of earnings persistence.

With earnings estimate downgrades accelerating and market concentration rising, these segments appear vulnerable to de-rating. Ambit recommends booking profits and rotating into large-cap quality sectors as a sensible risk-management approach for 2026.

IPO Market and Quality Concerns

The IPO market shows no signs of slowing, with 53 companies currently in the pipeline having filed their draft papers. However, the quality of companies coming to market has deteriorated materially compared with earlier cycles. Median three-year cumulative pre-tax cash flow to EBITDA conversion has declined from 102.00% for listings to just 59.00% for recent listings, highlighting the importance of cash conversion metrics in stock selection.