Indian equity markets are expected to remain range-bound for an extended period as elevated valuations and subdued earnings growth limit upside potential, according to Ajay Tyagi from UTI AMC. Speaking to ET Now, Tyagi emphasized that while domestic institutional investors continue providing market support, structural challenges persist in current market conditions.

Market Consolidation and Valuation Concerns

Tyagi noted that Indian markets have been trading at a premium to long-term averages since 2024, with the consolidation phase beginning after markets peaked around August 2024. The prolonged consolidation spanning nearly 18 months has been primarily driven by weaker-than-expected earnings growth.

"Markets were building in stronger-than-trend earnings growth and were disappointed," Tyagi explained, adding that his forecast suggests markets could remain range-bound for approximately one more year.

FY27 Growth Expectations Already Factored In

While FY27 is expected to witness earnings acceleration supported by policy measures aimed at boosting consumption, Tyagi cautioned that markets have already incorporated much of this optimism. The consensus estimates project 16% earnings growth for FY27 over FY26, driven by income-tax benefits and GST rationalization measures that could result in household savings of nearly $35 billion.

"To some extent, all of these positive measures are already built in, and despite that, valuations remain elevated," Tyagi stated. "So yes, we may see better growth from corporate India, but whether markets move up substantially on the back of those numbers is doubtful."

Sectoral Opportunities Emerge

Despite broad market challenges, Tyagi identified valuation comfort in select sectors, particularly private sector banks, IT, and automobiles. Private sector banks present attractive opportunities as they have not participated in recent rallies and currently trade at discounts to long-term averages.

The IT sector, which has underperformed over the past two to three years, offers relative value as valuations approach long-term averages. Tyagi dismissed concerns about AI disruption, noting that "history shows that whenever a new technology comes in, Indian IT companies gain over the medium term."

Auto Sector Preferences

Within the automobile sector, Tyagi expressed a clear preference for original equipment manufacturers (OEMs) over ancillary companies, calling the valuation gap "inexplicable." OEMs have demonstrated superior performance across multiple timeframes while trading at significantly lower multiples than ancillaries.

"Over three, five and ten years, OEMs have delivered better outcomes, yet they trade at significantly lower multiples than ancillaries," he observed. OEMs offer stronger balance sheets, superior return ratios, and better growth visibility compared to their ancillary counterparts.

Among OEMs, passenger vehicles, including utility vehicles, present the most compelling structural growth opportunity due to under-penetration and rising per capita income levels that will enable more households to afford passenger cars.

US equity markets continue to demonstrate remarkable resilience despite persistent geopolitical and policy uncertainties, with market strength now extending well beyond the traditional mega-cap technology leaders. Arvind Sanger of Geosphere Capital highlights this broadening rally as a positive indicator of underlying market health and economic optimism.

Market Breadth Expansion Beyond Technology

The current market dynamics reveal a significant shift from the narrow leadership that previously characterized US equity performance. While the Nasdaq remains supported by artificial intelligence themes, Sanger emphasizes that market strength has diversified across multiple sectors and indices.

"The fact that tech stocks are taking a little bit of a breather is not a bad thing for the market. It is a good thing because you are seeing a broadening of economic optimism," Sanger explains. This diversification indicates that market participants are finding value across various sectors rather than concentrating investments in a narrow group of stocks.

Federal Reserve Policy and Economic Outlook

Sanger's optimistic assessment is supported by expectations of monetary policy adjustments and stable economic fundamentals. The market anticipates two to three Federal Reserve rate cuts during the current year, which could provide additional support for equity valuations across sectors.

The key variable that will determine the sustainability of current market optimism is corporate earnings performance. Sanger emphasizes that earnings results will ultimately validate whether the broadening rally reflects genuine economic strength or temporary market rotation.

Venezuela Oil Investment Reality Check

Regarding recent remarks about major oil company investments in Venezuela, Sanger advocates for a measured approach to such announcements. Energy executives at the Goldman Energy Conference have consistently highlighted the importance of contract security and stable policy frameworks before committing capital to new ventures.

"Nobody is going to make investments that pay off in the next two years. Any meaningful impact would be in year three and beyond," Sanger notes. Oil markets have been positive two out of the last three days, suggesting no expectation of immediate Venezuelan oil supply increases.

Geopolitical Risks and Market Implications

Sanger warns that an increasingly aggressive US international posture could create long-term challenges for global market stability. Countries uncomfortable with full US alignment may need to increase defense spending and diversify away from US treasuries, potentially disrupting established financial flows.

The potential shift away from a rules-based global order could trigger increased investment in unproductive assets such as defense capabilities, gold, and other safe havens. "Markets have operated under a backdrop of a stable and reliable world order. You are now seeing more unproductive investment in defence, gold and other safe assets," Sanger observes.

Investment Strategy and Positioning

Given the current environment, Sanger maintains a cautious overall approach while identifying specific opportunities. His firm is allocating capital to energy supply chains critical for AI data centers, viewing this theme as relatively insulated from macro volatility.

For India specifically, the focus remains on domestic-facing industries and individual company opportunities in power, automotive, and non-banking financial companies rather than broad macro positioning. Some capital remains on the sidelines as global uncertainties continue to develop.