Indian equity markets continue to experience a challenging environment, repeatedly touching fresh all-time highs but struggling to sustain momentum amid expiry-related pressures and persistent selling. The Nifty has demonstrated this pattern for several weeks, creating uncertainty about the durability of current market strength.

Strong Domestic Support Provides Market Floor

According to Abhay Agarwal from Piper Serica, the market's recent behavior reflects a clear dynamic between domestic and foreign investor sentiment. The analysis reveals strong domestic support at key levels.

Agarwal noted that domestic flows remain adequate to prevent significant declines, stating that markets have "very strong support at the 26,000 level, where domestic flows are adequate to keep it at that level and not let it fall."

Foreign Investment Concerns Limit Upside Potential

The absence of meaningful foreign portfolio investor participation continues to constrain market advances. Agarwal highlighted that sustained upside remains difficult without overseas participation, emphasizing that the $18.00 billion FPI outflow represents a significant headwind.

Foreign investors are expected to remain cautious until trade deal clarity emerges. The uncertainty extends beyond announcements to actual agreement implementation, with concerns that delays could lead to additional penal tariffs on Indian companies or exporters.

IT Sector Earnings Outlook Remains Subdued

With TCS scheduled to begin the earnings season on January 12, expectations for the IT sector remain notably muted. Agarwal characterized the sector's challenges as structural rather than cyclical.

The analysis suggests that large software services companies face internal issues requiring resolution, independent of global environment changes. Management guidance is expected to remain conservative, with companies likely projecting growth in the 2.00% to 5.00% range in constant currency terms.

Retail Sector Shows Mixed Signals

Recent quarterly updates have raised concerns across the retail sector, with weakness appearing even in value retail segments. Same-store sales growth has decelerated across multiple players, though Agarwal cautioned against drawing broad conclusions from single-quarter performance.

Value retail in non-tier I cities continues demonstrating resilience despite growing e-commerce competition. The analysis suggests that inventory management and accounting practices can significantly distort short-term performance metrics, requiring additional quarters of data for accurate trend assessment.

Market Outlook and Participation Trends

The broader market narrative reflects ongoing consolidation, with domestic liquidity providing support while global uncertainty limits upside potential. Agarwal anticipates that rally participation will broaden to include smaller and midcap stocks, which experienced limited participation in the previous year.

The current environment suggests markets will continue operating within established ranges until foreign investor sentiment improves and trade deal clarity emerges. Domestic support mechanisms remain robust, providing a foundation for market stability even amid challenging external conditions.

Indian equity markets are positioned for significantly improved performance in 2026 despite experiencing substantial corrections across small and mid-cap segments during 2025, according to Dhiraj Relli, MD & CEO of HDFC Securities. While benchmark indices suggested relative stability, the underlying market pain was considerable, with specific segments facing sharp declines from their recent peaks.

Market Correction Creates Foundation for Recovery

The extent of the correction across market segments reveals the depth of the consolidation phase:

Relli attributes the 2025 consolidation to multiple factors including elevated valuations, trade deal-related uncertainties, a weakening rupee, and persistent foreign portfolio investor (FPI) selling that limited upside potential. However, he believes these corrections have created a healthier foundation for future gains.

Structural Tailwinds Support 2026 Outlook

Several key factors are expected to drive improved market performance in the coming year. Corporate earnings growth, which remained in low single digits during FY25, is projected to accelerate meaningfully to 10-15% over the next two years, providing fundamental support for market appreciation.

Systematic Investment Plan (SIP) flows continue to remain robust, supporting steady domestic demand despite global volatility. Additionally, foreign investors who were net sellers through much of 2025 have shown signs of stabilization in recent sessions. The inflation environment remains manageable, providing the Reserve Bank of India with flexibility to cut rates if economic conditions warrant support.

Selective Approach Required for Smaller Segments

Despite the structural improvements, Relli emphasizes that extreme selectivity remains essential when investing in mid-cap, small-cap, and micro-cap segments. Many stocks that experienced euphoric valuations may not revisit their highs in the near term, requiring investors to maintain discipline across three key areas:

• Valuations: Careful assessment of price levels relative to fundamentals
• Quality: Focus on businesses with strong operational metrics
• Position sizing: Appropriate allocation to manage concentration risk

Relli recommends maintaining 60-65% of portfolios in large-cap stocks with active rebalancing to prevent excessive exposure to more volatile segments. He expects market performance to be stock-specific heading into 2026, with incremental improvement in small and mid-cap stocks likely to be selective rather than broad-based.

Sector Preferences and Investment Strategy

HDFC Securities maintains a constructive view on several key sectors for 2026:

For new investors with ₹10.00 lakh portfolios, Relli advises against chasing recent performance in assets like gold and silver, which have experienced significant rallies. Instead, he recommends focusing on appropriate asset allocation based on individual goals, investment horizon, and risk appetite.

Key Risks and Challenges Ahead

Several risks require careful monitoring as markets enter 2026. Global macro headwinds include escalating US debt levels that could spike global yields and tighten liquidity for emerging markets. Domestically, India faces a critical gap between robust government infrastructure spending and a stalled private capex cycle.

Valuation risks remain acute in mid and small-cap segments, which continue trading at rich multiples well above their 10-year averages. The market has fundamentally shifted from rewarding "growth at any price" to demanding "quality at a reasonable price," meaning companies with weak balance sheets face harsher penalties than in previous years.

Despite these challenges, if corporate India meets earnings expectations, Relli believes the outlook for double-digit returns in 2026 appears not only reasonable but potentially conservative, with the foundation for a strong year already established.