Markets have priced in stable Q3 updates, Indo-US trade deal key for next rally: Aditya Shah

Indian equity markets are experiencing steady corporate updates across multiple sectors, yet investors remain cautious as benchmark indices stay range-bound. Aditya Shah, Founder of Hercules Advisors, suggests this measured response indicates that much of the near-term market optimism has already been factored into current valuations.

Q3 Earnings Expectations Already Priced In

Shah believes the market has already anticipated stable third-quarter results across key sectors. The banking sector continues to demonstrate robust fundamentals, while consumption companies show mixed signals amid evolving market dynamics.

"I think that the market already knew that stable Q3 numbers would come in," Shah explained, noting that overall earnings growth for the broader market is likely to remain modest but stable. He expects Nifty 50 growth to be around 5-10%, with individual companies growing based on their specific fundamentals.

Indo-US Trade Deal as 2026 Catalyst

Looking ahead, Shah identified a significant geopolitical development as the primary market trigger for 2026. The potential Indo-US trade deal represents the most crucial factor that could break the current range-bound trading pattern.

"The biggest trigger in 2026 for the market will be the Indo-US trade deal. If that really happens, that really lifts the sentiment of the market and the market will then move on," Shah stated. Without such a deal, he expects markets to remain range-bound, making stock-specific strategies more relevant for investors.

Banking Sector Strategy: Three-Pronged Approach

Shah outlined a comprehensive strategy for banking and NBFC investments, emphasizing different risk-reward profiles across various segments.

Large-Cap Banks for Stability

Larger banks like HDFC and ICICI are positioned as steady compounders, benefiting from consistent growth and strong fundamentals. These institutions continue to demonstrate resilience with loan growth of 10-15% and steady deposit expansion.

Specialized Opportunities

Among smaller lenders, Shah highlighted gold-focused banks such as CSB Bank and Federal Bank, which benefit from rising gold prices providing strong traction to their loan portfolios. Additionally, early signs of improvement are emerging in microfinance lenders.

"Ujjivan companies have also declared their NPAs. They have seen improvement, and it sharply tells us that the micro-lending cycle has abated," Shah noted, while cautioning that these remain highly risky investments suitable only for risk-tolerant investors.

Consumption Stocks: Defensive but Expensive

Despite the recent GST reduction on namkeens and packaged foods, Shah maintains a cautious stance on consumption stocks due to elevated valuations. While the sector remains defensive in nature, current pricing levels limit fresh investment opportunities.

"From my perspective, consumption continues to be a defensive theme. However, valuations across the consumption space continue to be really very punchy and really very expensive," Shah observed. He expects earnings growth of 10-15% but believes steep valuations constrain upside potential.

ITC as Preferred Pick

Within the FMCG space, Shah prefers ITC as a relatively safer investment option. The conglomerate's diversified business model, including its improving FMCG operations, presents attractive long-term prospects.

"ITC is in a much better space within their hotels business and within their FMCG business. The main driver here is that a lot of scope for profitability turnaround within the FMCG space is available," Shah explained, emphasizing the three-to-five-year improvement timeline.

As markets continue to digest steady earnings updates, investors appear positioned for a wait-and-see approach, focusing on stock-specific opportunities while anticipating decisive catalysts to drive the next significant market movement.