Indian equity markets are poised for a cautious opening on Friday as multiple global headwinds continue to influence investor sentiment. Despite Gift Nifty trading at 25,786, signaling a positive headstart of approximately 76 points for the Nifty, market participants remain wary of fast-changing geopolitical developments and trade-related uncertainties.

Market Sentiment and Global Factors

Ponmudi R, CEO of Enrich Money, highlighted the prevailing cautious mood in the markets. "Indian equity markets are set to begin the session on a cautious, range-bound note as multiple global headwinds continue to cap risk appetite," he stated. The ongoing geopolitical developments and tariff-related uncertainties are creating near-term visibility challenges, preventing investors from taking aggressive positions.

The market sentiment remains further constrained by persistent foreign institutional investor outflows and mixed reactions to Q3 earnings results. This combination has led market participants to adopt a more selective and defensive investment approach. Asian markets are displaying mixed trends in early trading, with Japanese and Chinese indices showing mild losses while South Korean equities demonstrate relative strength.

Domestic Economic Outlook

Despite global challenges, India's domestic fundamentals present a more optimistic picture. Pawan Kumar, Chief Investment Officer at Neo Wealth Management, emphasized the country's strong economic positioning in their yearly outlook assessment.

The positive outlook is supported by several key factors including increased government spending, robust rural economic activities, and an uptick in manufacturing sector performance. Kumar noted that India remains the only large economy likely to report GDP growth higher than its long-term averages while maintaining inflation rates below historical norms.

Large-cap indices appear fairly priced with expectations of double-digit profit after tax growth over the next 2-3 years. This growth trajectory is anticipated due to favorable base effects, improving economic activity, low interest rates, and government reforms including GST rationalization.

Derivatives Market Signals

The derivatives segment provides clear insights into market expectations and trader positioning. Dhupesh Dhameja, Derivatives Research Analyst at SAMCO Securities, observed that the derivatives setup mirrors the sideways-to-bearish undertone seen in the cash market.

Call writers have aggressively established fresh positions at at-the-money and nearby strike prices, effectively creating a ceiling for near-term upside movement. Meanwhile, put writers have concentrated their positions at lower strikes, suggesting market expectations of range-bound trading with limited downside potential.

The significant open interest buildup of nearly 1.13 crore contracts at the 26,000 call strike establishes this level as a key near-term resistance point. Additionally, the increase of around 50.80 lakh call contracts at the 25,600 strike reinforces the overhead supply pressure.

Market Challenges and Focus Areas

While domestic fundamentals remain supportive, several factors are weighing down the overall market assessment. The expensive valuations in mid-cap and small-cap segments, substantial equity supply from Indian promoters, and uncertainty surrounding India-U.S. trade negotiations present ongoing challenges. Expected decline in global economic activities adds another layer of concern for market participants.

Today's trading session is expected to remain largely stock-specific, driven by December-quarter earnings announcements and management commentary. Investors will closely monitor developments in the Middle East, particularly any potential disruptions to oil supplies that could impact energy prices and broader market sentiment.

Indian equity markets have begun 2026 on a subdued note, increasingly decoupling from global peers as investors navigate uncertainty around earnings visibility and trade-related developments. Despite pockets of optimism around macro growth and policy stability, market sentiment remains cautious amid the absence of clear catalysts.

Speaking to ET Now, Harsha Upadhyaya, CIO at Kotak Mahindra AMC, acknowledged that the current phase reflects hesitation rather than outright pessimism. The lack of strong triggers from either earnings or geopolitical developments has kept indices range-bound, with markets waiting for decisive clarity on multiple fronts.

Valuation Concerns Persist Across Market Segments

Upadhyaya highlighted the combination of factors weighing on market sentiment, noting that expensive valuations remain a key concern. "Clearly, both of those factors, the impending trade deal as well as the earnings scenario, which has not really turned around in a big way as yet, are keeping markets at a particular range," he explained.

The CIO emphasized that without decisive improvement in earnings growth, particularly in the smallcap segment, broad-based market positivity remains elusive. "Until and unless the sentiment turns or there is a real pickup in terms of the earnings growth trajectory for small caps, we may not see all-around positiveness in the market," he stated.

Moderate Recovery Expected for 2026

Despite near-term challenges, Upadhyaya maintains a cautiously optimistic medium-term outlook. He expects moderate recovery in earnings growth for 2026, supported by the market's consolidation phase over the past one-and-a-half years. "For 2026, we do expect a moderate recovery in earnings growth, and given the fact that we have already seen a consolidation for almost about one-and-a-half years, we do believe that 2026 returns will be moderately better than 2025," he noted.

While GDP growth remains supportive, recent quarters have witnessed deceleration in earnings trajectory. Although downgrade cycles appear largely complete, the market has yet to see meaningful upgrades, with Q3 earnings expected to show sequential improvement over Q2 without providing sufficient momentum for material sentiment shift.

Sector-Specific Outlook and Performance Expectations

Upadhyaya provided detailed insights into sector-specific performance expectations, highlighting divergent trends across industries.

Information Technology: The IT sector, traditionally viewed as a bellwether for global demand, has delivered results largely in line with expectations. However, Upadhyaya maintains an underweight stance, noting that "when you look at the expectations for the rest of financial year 26 and financial year 27, this sector is likely to lag average market earnings growth." He views IT as a defensive allocation with steady cash flows but limited upside potential.

Financial Services: Financials emerge as a relative bright spot in Upadhyaya's assessment, particularly over a one-to-two-year horizon. While NBFCs and public sector banks outperformed in 2025, large private banks lagged despite improving business fundamentals.

"We have seen most of the cost pressures that came through because of the repo rate cut probably behind us. We should also expect credit growth improvement over the next few quarters," Upadhyaya explained, noting contained asset quality concerns and reasonable valuations after underperformance.

Domestic Sectors: For Q3 earnings, Upadhyaya anticipates strength from domestically driven segments including telecom, automobiles, cement, and oil marketing companies. Metals may see improvement in later quarters rather than immediate gains, while globally linked sectors could continue lagging.

Budget Expectations and Fiscal Constraints

With the Union Budget approaching, Upadhyaya maintains tempered expectations regarding major policy announcements. He highlighted that while real GDP growth has improved, low inflation has capped nominal GDP growth, limiting fiscal flexibility for aggressive spending measures.

"It is very unlikely that you will see a very large increase in terms of capital spend," he noted, though a 10.00-11.00% rise in capex would remain healthy given the higher base. The government is expected to balance capital expenditure with consumption support measures, including refinements to PLI schemes, while major taxation changes appear unlikely.

Markets currently remain in a waiting phase, caught between improving medium-term fundamentals and lack of immediate catalysts. Until clarity emerges on earnings upgrades or trade developments, range-bound movements may continue defining the current market phase, with any recovery expected to be moderate rather than resembling the bull run witnessed between 2020 and 2024.