Prateek Agarwal, MD & CEO of MOAMC, expects 2026 to be a year of selective revival for Indian equities, led by earnings growth, improved valuation comfort, and a potential return of foreign portfolio investors (FPIs) after a challenging and narrow market in 2025. Speaking to ET Now, Agarwal outlined his outlook for the Indian equity markets, highlighting key factors that could drive recovery in the coming year.

Indian Markets Decouple from Global Performance

Indian markets underperformed global peers in 2025 despite strong domestic reforms, largely due to heavy FPI selling. While global themes such as defence, renewables, EVs and new-age tech performed well overseas, many of these sectors saw sharp profit-booking in India, leading to a divergence from global trends.

"Valuations were a concern at the start of last year. They are less so now, even though India is still not cheap globally," Agarwal noted. He emphasized that lower global bond yields and a stable rupee could restore market normalcy and attract risk capital back into India.

Recovery Depends on Earnings Growth and Foreign Flows

The pain in midcap and smallcap portfolios stemmed from sustained FPI selling, which triggered selling by HNIs and retail investors, narrowing market breadth. Agarwal believes a reversal will require a combination of strong corporate results and renewed foreign inflows.

"Q2 results were encouraging and Q3 should be better. Markets ultimately follow earnings growth," he said, adding that improved India-US trade relations could act as a sentiment booster for FPIs.

Sector Positioning and IT Outlook

On portfolio positioning, Agarwal said index-heavy leadership could continue if the market remains narrow, as seen with banks and IT services. However, he flagged structural moderation in IT earnings growth, returning to a 5-10% range after a brief post-pandemic surge.

"If growth reverts to sub-10%, valuations should also adjust accordingly. Returns will broadly track earnings growth," he said, suggesting selective opportunities may still exist in mid- and small-cap IT firms with higher growth visibility.

Valuation Premium Remains Defensible

Agarwal acknowledged that Indian equities trade at 1.5-2 times global valuations across sectors, including banks, cement and steel. However, he defended the premium, citing India's demographics, scale, aspiration-led consumption, and long growth runway.

"India offers scale and longevity of growth that very few markets do," he said, adding that in a deglobalising world, companies with strong domestic access deserve valuation support. Interestingly, Agarwal pointed out that many high-growth sectors from 2024 have seen sharp price corrections despite strong earnings growth, leading to meaningful valuation resets. "Some of yesterday's growth stocks now look like value opportunities," he said.

2026 Market Outlook

While cautioning that a calendar change alone does not alter market direction, Agarwal said earnings momentum and valuation compression have improved the risk-reward equation in several high-growth segments. If FPIs return and earnings deliver, 2026 could see leadership broaden beyond a handful of stocks, marking a potential shift from the narrow market conditions experienced in 2025.

ICICI Prudential's Anand Shah believes India's underwhelming 2025 market performance may have delivered an unexpected benefit—a much-needed valuation reset that could create selective opportunities in 2026. While global emerging markets surged nearly 30%, India barely managed to break even in dollar terms, a stark underperformance that Shah views as addressing long-standing valuation concerns.

"One of the biggest issues earlier was the valuation premium India traded at," Shah explained. "To that extent, valuations are not so much of an issue anymore." This reset forms the foundation of his outlook for 2026, which he expects will prioritize execution over grand market narratives.

AI Investment Risks Create Opportunity

Shah acknowledges AI's technological inevitability but questions the premium valuations commanding global capital flows. He draws parallels between today's AI investment frenzy and the telecom sector's early 2000s experience, where demand certainty didn't translate to sustainable business models for many companies.

"The issue was not whether people would use it," Shah noted about the telecom comparison. "The issue was cash flow." This overinvestment risk, combined with premium valuations, creates what he terms 'extreme risks' in AI-linked stocks.

Should AI sentiment shift even marginally, Shah anticipates capital could flow toward markets offering growth without binary outcomes—positioning India as a potential beneficiary.

Indian IT's Strategic Position

While acknowledging that India won't lead AI creation, Shah sees Indian IT firms as well-positioned enablers rather than builders. He points to the sector's historical success in monetizing major technology transitions, from addressing global computing challenges to facilitating cloud migrations.

As enterprises transition from AI experimentation to deployment, Shah expects demand to shift toward areas where Indian IT firms maintain structural advantages:

• Integration services
• System optimization
• Cost control solutions

This positioning aligns with Indian IT's traditional strengths in helping global corporations adapt to technological changes.

Sector-Specific Opportunities

Despite cautioning against expecting valuation-led market rallies, Shah remains constructive on specific sectors. With profit-to-GDP already recovering significantly, he emphasizes that "market expectations have to align with nominal GDP growth."

Shah particularly favors services-led consumption over product consumption, citing high penetration levels in product categories. In manufacturing and allied sectors, valuations have necessitated a shift toward selective, bottom-up stock picking rather than broad thematic investing.

Execution Over Narrative

Looking ahead, Shah believes 2026 will mark a fundamental shift in investment approach. "The theme for 2026 is narrative to execution, macro to micro," he stated, suggesting that the era of easy thematic investing—whether in AI, manufacturing, or China-plus-one strategies—is giving way to more rigorous scrutiny and execution-focused analysis.

This transition from grand narratives to selective opportunity identification reflects a broader maturation in market approach, where fundamental execution capabilities may matter more than participation in popular investment themes.