Naveen Kulkarni, Chief Investment Officer at Axis Securities PMS, has expressed cautious optimism about the upcoming Union Budget's impact on market dynamics, suggesting that earnings growth rather than fiscal policy will be the primary driver for equity markets in 2026.

Limited Budget Impact on FII Flows

Kulkarni believes the Union Budget may have a restricted role in attracting Foreign Institutional Investor flows back to India. He points to the government's proactive measures taken before the budget, particularly the reduction in GST rates to stimulate consumption spending, which has already begun showing impact.

"Union Budgets have not been a major market moving event in recent years," Kulkarni noted, explaining that while expectations run high before the budget, post-budget triggers have often been limited.

Balanced Approach Expected

The investment expert anticipates the budget will maintain equilibrium between consumption-oriented initiatives and capital expenditure spending. He acknowledges that while capex and infrastructure development will remain critical, there is insufficient room to push spending beyond the nominal GDP growth rate.

Regarding economic growth prospects, Kulkarni views a GDP growth rate of 7.50% as an excellent starting point, describing such real GDP growth as very impressive. He suggests that achieving this growth rate in FY26 would position India as a top global investment destination.

Earnings Growth Takes Center Stage

The most significant concern for equity markets, according to Kulkarni, will be earnings growth trajectory in 2026. He highlighted that FY25 and FY26 were not particularly strong from an earnings growth perspective, with corporate earnings expanding only in single digits.

"The key concern for equity markets will be earnings growth in 2026. This needs to pick up, as any negative surprise could weigh on market sentiment," Kulkarni emphasized. Current expectations point toward double-digit earnings growth in 2026, supported by a low base effect.

Q3 Earnings Season Assessment

Regarding the ongoing Q3 earnings season, Kulkarni reported that performance has largely aligned with expectations across sectors. BFSI companies have delivered in-line numbers, while the IT sector has reported results that are in-line to marginally better. He expects FY27 to be a strong year with double-digit early teens earnings growth for NIFTY 50 stocks, with broader market earnings potentially exceeding NIFTY 50 performance.

Federal Reserve and Geopolitical Risks

On monetary policy, Kulkarni anticipates the US Federal Reserve will likely pause rate cuts at its January meeting due to elevated personal consumption inflation levels. Regarding geopolitical risks, he believes geo-economic confrontation has already been factored into stock prices, making earnings growth the more critical market driver.

The investment expert warns that if the earnings growth trajectory falls short of expectations, Indian equities could face further derating, making 2026 earnings performance crucial for market sentiment and valuation sustainability.