Pankaj Pandey, Head of Retail Research at ICICI Direct, expects the real estate sector to receive maximum government support in the upcoming Union Budget, citing its substantial economic impact and employment generation potential. His outlook suggests a positive turn for small cap stocks after recent underperformance.

Real Estate Sector Positioned for Budget Support

The real estate sector stands to benefit most from government measures due to several key factors. Pandey highlights the sector's significant economic contribution and employment potential as primary drivers for policy support.

Affordable housing, currently under stress, may receive specific relief measures including expanded definitions in terms of value and unit sizes. Additional support measures could encompass increased home loan interest deduction limits, enhanced credit access for developers, incentives for first-time buyers, single window clearances, and infrastructure status grants.

Small Caps Set for Recovery

Historical analysis reveals promising prospects for small cap stocks in the current year. Pandey's research indicates strong statistical support for a small cap recovery based on two decades of market data.

Banking Sector Outlook

The banking sector continues to benefit from structural improvements and enhanced resilience. Key positive factors include benign asset quality trends, structurally lower credit costs, and stronger balance sheet positions following multi-year cleanup efforts.

The increasing focus on RAM (Retail, Agriculture, MSME) segments and improved loan granularity are reducing earnings volatility while supporting more sustainable Return on Assets. ICICI Direct maintains an instrumental stance on banking with a slight preference for PSU banks and mid-cap private banks.

Sector-Specific Performance Analysis

Auto and metal sectors have delivered strong performance over the past year, with specific segments showing continued promise despite overall sector gains.

While most investable stocks in these sectors have appreciated significantly, select opportunities remain in passenger vehicle segments within auto (supported by growth longevity) and ferrous players in metals (benefiting from safeguard duty imposition).

Market Consolidation and Federal Reserve Outlook

Pandey expects first quarter consolidation to continue given fluid trade tariff situations and geopolitical tensions. However, investor focus is likely to shift toward corporate earnings and macroeconomic growth as the year progresses.

Regarding Federal Reserve policy, the probability of another rate cut in January appears low following December's third consecutive 25-basis-point reduction. The Fed's projection of just one rate cut in CY26, combined with lifted growth expectations and inflation uncertainty, suggests limited scope for immediate policy easing.

Market analyst Pankaj Pandey, Head of Research at ICICI Direct, has outlined a cautious outlook for upcoming earnings while identifying selective opportunities across key sectors. Speaking to ET Now, Pandey emphasized the importance of being discerning in the current market environment as various sectors navigate different growth trajectories.

IT Sector Earnings Outlook

Ahead of key earnings announcements from TCS and HCL Tech, Pandey has tempered expectations for significant surprises in the IT sector. The analyst projects modest growth for tier-I IT companies in the upcoming quarter.

Pandey stressed that management commentary will carry more weight than headline numbers, with investors focusing on commentary regarding CY26 budgets, discretionary spending revival signs, and Gen-AI scaling progress. Among IT stocks, his preferences include LTIMindtree and KPIT, where growth visibility appears relatively stronger.

Insurance Sector Shows Mixed Trends

The life insurance sector has demonstrated uneven growth patterns throughout the year, with performance varying significantly across quarters.

Despite the improvement in recent months, margin pressures remain a significant concern. Distributor payouts are expected to be fully implemented by the fourth quarter, potentially weighing on profitability in the second half. Pandey maintains selectivity in this space, preferring companies focused on non-participating and unit-linked products, with HDFC Life as the preferred pick carrying a target price of ₹860.00.

Real Estate Sector Presents Selective Opportunities

The real estate sector faces a complex landscape with contrasting performance between residential and commercial segments. Pandey pushed back against broad-based slowdown concerns, noting the sector's strong 2024 performance of approximately 38% returns, despite being among the worst performers in 2025.

Pandey highlighted Phoenix Mills as a preferred investment, citing strong consumption growth in malls and improving leasing activity. The analyst remains constructive on players with balanced residential and commercial asset mix, particularly favoring DLF and Max Estates where commercial operations contribute meaningfully to overall performance.

Market Positioning and Strategy

The recent market correction has already priced in considerable risk across sectors, according to Pandey's analysis. Most real estate companies are currently trading below their Net Asset Values (NAVs), presenting potential opportunities for selective investors. However, execution timelines remain challenging, particularly on the residential side, with some companies potentially missing full-year pre-sales guidance.

Pandey emphasized that current interest rates remain at lifetime lows, supporting the fundamental case for real estate investments despite near-term headwinds. The analyst advocates for a selective approach rather than broad sector exposure, focusing on companies with strong execution capabilities and diversified revenue streams.