Indian equity markets face mounting challenges as earnings growth expectations continue to moderate, with industry experts warning of prolonged underperformance compared to global peers. Dhiraj Agarwal, Managing Director at Ambit Investment Managers, has expressed concerns about India's ability to achieve robust earnings growth in the current fiscal environment.

Earnings Growth Projections Fall Short

Agarwal believes India's earnings per share growth will likely remain below 10% in FY27, despite consensus estimates projecting around 17% growth. This projection stands in stark contrast to global markets, where several regions are expected to deliver significantly higher earnings growth.

The pattern of earnings downgrades has become a recurring theme for Indian markets. FY26 began with earnings growth expectations of 16-17%, which subsequently declined to 7% by year-end. Agarwal noted that marginal downgrades have already begun appearing for FY27, with no significant upgrades materializing.

Market Pressures and Structural Challenges

Several factors are contributing to the subdued outlook for Indian equities. Continuous foreign portfolio investor outflows have created sustained pressure on market performance. Additionally, the combination of increased IPO supply and limited domestic inflows has made market recovery more challenging.

While valuations have corrected from previously stretched levels, the fundamental demand environment remains concerning. The anticipated boost from Goods and Services Tax cuts implemented in September proved short-lived, lasting only four to six weeks before cooling off.

Budget Impact Expected to be Minimal

Regarding the upcoming Union Budget, Agarwal anticipates limited market impact, describing it as "more of an accounting exercise." With nominal GDP growth projected at 8.50-9.00%, he expects the government to maintain fiscal discipline, leaving little room for aggressive spending measures.

Key budget considerations include:

• Maintaining fiscal discipline amid growth constraints
• Limited scope for aggressive spending initiatives
• Reduced significance of budget announcements on market movements
• Expected short-lived volatility from any budget-related developments

Investment Strategy Implications

The challenging earnings environment suggests investors may need to recalibrate expectations for Indian equity returns. The persistent gap between initial earnings projections and actual delivery indicates a need for more conservative growth assumptions. Market participants are advised to focus on companies with sustainable business models and strong fundamentals rather than relying on broad market momentum.

The combination of earnings pressure, foreign investor outflows, and weak demand trends suggests that Indian markets may continue to face headwinds in the near term, requiring careful stock selection and risk management strategies.

Indian equity markets witnessed their steepest decline in four months as broad-based selling pressure intensified across all segments. The benchmark Nifty50 index fell 2.51% to close at 25,048.65, while mid-cap and small-cap stocks suffered even more severe losses, dropping between 4% and 6% over the week.

Market Performance Overview

January 2026 has proven particularly challenging for investors across market segments:

The selloff was comprehensive, with every sectoral index closing in negative territory. Real estate stocks bore the brunt of the decline, plummeting 11%, while consumer durables fell 6.5% and media stocks declined 4%. The oil and gas, energy, infrastructure, defence, and healthcare sectors each lost approximately 3%.

FII Selling Pressure Intensifies

Foreign Institutional Investors continued their sustained exodus from Indian markets, creating significant downward pressure on domestic equities:

The net short position of 227,573 contracts in index futures held by FIIs represents an all-time high, marking only the second instance in data history and the first since the COVID period. This directional short position was established near the market peak, distinguishing it from typical contrarian buying opportunities.

Technical Analysis and Market Indicators

The Nifty has declined for three consecutive weeks, with the weekly RMI momentum indicator in sell mode since January 9th. Prices have fallen to the lower band at 24,741, representing two standard deviations below the 20-day moving average. The daily swing indicator ended the week at 17.84, with intraday readings dropping below 7, signaling extreme oversold conditions.

Using the Nifty Total Market Index comprising over 700 stocks, only 22.53% of stocks are trading above their 200-day moving average. This broad market gauge indicates widespread weakness, with readings below 20% typically signaling oversold territory.

Sector Rotation Analysis

Despite the overall market decline, certain sectors showed relative strength:

Leading Quadrant:

• Nifty Financial Services entered the leading quadrant with improved momentum
• Nifty IT continued gaining momentum and relative strength
• Nifty Bank and Private Bank showed turnaround signs
• Nifty Metal demonstrated significant improvement

Weakening Quadrant:

• Nifty Auto experienced sharp decline in relative strength
• Nifty Oil and Gas continued losing momentum
• Nifty PSU Bank showed initial turnaround signs

Global Market Influences

American markets experienced volatility following President Trump's announcement of new tariffs on European nations. However, stocks rebounded after Trump softened his stance, suggesting an agreement between NATO and the United States. The coming week is expected to be shaped by global macroeconomic developments as traders position ahead of India's Union Budget and Federal Reserve meeting.

Market Outlook

Market participants will closely monitor Fed Chairman Jerome Powell's responses regarding an ongoing investigation, as his remarks could influence global market sentiment. While no major policy changes are anticipated from the Federal Reserve meeting, the focus remains on India's Union Budget and its potential impact on market direction. Among individual stocks, Hindustan Zinc, Hindalco, Tech Mahindra, Vedanta, Shriram Finance, SBI, Tata Steel, Nestle, Federal Bank, Ashok Leyland, National Aluminium, and JK Tyre are expected to show better performance.