Markets are positioned for a potential multi-year bull run if the upcoming Union Budget 2026 strikes the right balance between infrastructure spending and consumption support, according to Himani Shah, Co-Fund Manager at Alchemy Capital Management. She emphasizes that investors are looking for a 'pragmatic' budget rather than a 'populist' one, with the current market correction potentially setting the stage for sustained growth.

Domestic Fundamentals Remain Strong Despite Global Headwinds

Shah highlights that India's domestic fundamentals remain remarkably resilient despite global uncertainties. The country is witnessing a structural revival in manufacturing, with recent data indicating performance at a 12-month high and an 8% growth rate. Strategic cuts in Income Tax and GST have provided significant liquidity injection for the middle class, successfully driving consumer spending.

Market Outlook and Growth Expectations

From a strategic standpoint, Shah anticipates mid-to-high single-digit market growth over the next 12 months. While expecting near-term underperformance as markets digest global volatility, she remains optimistic about fundamental indicators. High-frequency data supports this conviction, particularly the resurgence in auto sales and retail momentum.

However, she notes that GST collections growing at only 6% in December 2025 remain a primary variable to monitor. An uptick in GST collections would support the conservative floor of mid-to-high single-digit index returns, potentially representing high-quality growth underpinned by genuine earnings expansion.

Infrastructure Investment Remains Strategic Priority

Shah emphasizes that maintaining the Rs 11 trillion capex momentum is both an economic goal and strategic necessity. In an era of fragmenting global trade and rising geopolitical tensions, India cannot afford to reduce capital expenditure focus. The government must continue funding high-impact infrastructure including:

• Digital grids
• Electronics Manufacturing Services (EMS)
• Renewable energy ecosystems

This infrastructure commitment is crucial for capturing the 'China+1' opportunity, leveraging India's vast, young labor force to serve as a manufacturing alternative.

Budget 2026 Sector Focus Areas

Shah expects three sectors to be in the spotlight during Union Budget 2026:

Earnings Outlook and Risk Factors

While Q3FY26 results have shown substantial growth and revival, Shah cannot entirely rule out earnings volatility. The sustainability of this trend into Q4FY26 and beyond depends on the government's ability to maintain spending levels. If fiscal constraints force a pullback on the Rs 11 trillion capex plan, there may be slight cooling in industrial and infrastructure-linked earnings.

AI Impact on Employment and Investment Strategy

Regarding AI adoption's impact on employment, Shah views this as workforce 'displacement' rather than total hiring pause. She notes a historical inversion where white-collar cognitive roles face deflationary pressures from automation, while the 'real economy' sectors including manufacturing and physical infrastructure remain labor-hungry and resilient.

This creates investment opportunities in companies utilizing AI to expand operating margins without linearly increasing headcount, boosting Earnings Per Share. The strategy pivots toward 'physical world' sectors such as industrials and capital goods, where human expertise remains irreplaceable.

As the Indian government prepares to present Union Budget 2026-27 on February 1, stock market investors are bracing for the typical pre-budget volatility that has characterized Indian markets for over a decade. Historical data reveals a consistent pattern of market weakness ahead of budget presentations, driven by uncertainty over policy announcements and fiscal measures.

Historical Market Performance During Budget Season

Data from 2010-2022 demonstrates that Indian stock markets frequently experience downward pressure in the lead-up to Union Budget presentations. This trend reflects investor caution amid fears of unexpected policy changes that could impact various sectors and market segments.

The data shows that over the past 15 years, Nifty has posted negative returns in the month preceding the budget in four out of the last five years, including a decline in January 2025. Despite this pre-budget weakness, markets typically stage recoveries post-budget, with an average gain of 1.36% in the week following budget presentations.

Factors Driving Pre-Budget Market Weakness

The consistent pattern of pre-budget market decline stems from several key factors that create uncertainty among investors. Policy surprises remain the primary concern, as budget announcements can significantly impact sector-specific performance and overall market sentiment.

Elevated volatility characterizes budget periods, with the average intraday trading range reaching 2.65% on budget day itself. This heightened volatility reflects the market's attempt to price in potential policy changes and fiscal measures before official announcements.

Key factors contributing to pre-budget weakness include:

• Fear of unexpected policy announcements
• Uncertainty over fiscal deficit targets
• Anticipation of sector-specific tax changes
• Global economic headwinds and geopolitical tensions

Budget 2026 Expectations and Market Outlook

For Union Budget 2026, market expectations center on balancing fiscal prudence with growth stimulus amid global challenges. Rahul Sharma, Director and Head of Technical and Derivative Research at JM Financial Services Ltd, noted that key anticipations include increased capital expenditure on infrastructure, defense, and railways to shield the economy from external shocks.

CareEdge Ratings expects the fiscal deficit to GDP to be contained at 4.4% in FY26, with projections for fiscal deficit to be budgeted at 4.2-4.3% in FY27. The rating agency anticipates gross borrowing in the range of Rs 16-17 trillion in FY27 and net borrowing likely at Rs 11.5-12 trillion.

Recent Market Performance and Current Conditions

The domestic equity market ended the previous week on a weak note, with the Sensex dropping 770 points or 0.94% to close at 81,537.70, while Nifty fell 241 points or 0.95% to end at 25,048.65. This decline was attributed to profit booking, continued foreign investor selling, and uncertainty over geopolitical issues.

Trading remains suspended on Monday, January 26, due to the 77th Republic Day holiday, with markets set to resume on Tuesday. Investors are positioning cautiously ahead of multiple key events, including the Union Budget, US Federal Reserve meeting, ongoing corporate earnings, and global developments.

Historical Budget Performance Analysis

Recent budget presentations have shown mixed market reactions, reinforcing the pattern of short-term volatility followed by longer-term reassessment. Budget 2025, which prioritized income tax cuts to spur private consumption, saw benchmark indices close flat on budget day, though markets declined sharply in the following month.

Budgets 2023 and 2024 exhibited similar patterns with cautious optimism on policy intent but mixed market reactions. In contrast, Budget 2017 delivered more immediate positive responses with tax relief measures, while Budget 2016's rural-focused initiatives initially disappointed markets before staging recovery in subsequent weeks.

Market participants are advised to maintain cash positions until post-budget clarity emerges, with selective opportunities expected in sectors like defense and PSU banks. The consistent historical pattern suggests that while pre-budget weakness is typical, patient investors often benefit from post-announcement market adjustments and policy clarity.