Indian equity markets witnessed a sharp decline on Friday, with both major benchmarks closing significantly lower as investor sentiment remained subdued throughout the trading session.

Market Performance Overview

The benchmark indices faced considerable selling pressure, with the Sensex tumbling 770 points during the session. The Nifty also experienced a notable decline, settling below the psychologically important 23,100 level by market close.

Market Sentiment and Trading Activity

Investor sentiment remained cautious throughout the trading session, with market participants adopting a wait-and-watch approach. The prevailing uncertainty contributed to range-bound trading activity as investors exercised restraint in their investment decisions.

Key Market Drivers

Several factors influenced market movement during the session:

• Global Market Tracking: Investors closely monitored international market developments and cues from overseas markets
• Domestic Triggers: Market participants awaited further clarity on domestic market catalysts and developments
• Cautious Approach: The overall trading environment reflected a risk-averse stance among investors

The combination of global market influences and anticipation of domestic developments created a challenging trading environment, with investors preferring to stay on the sidelines until clearer directional cues emerged.

Indian equities have navigated a challenging phase marked by a 15-month price correction and consolidation period, with narrow market leadership and uneven earnings performance shaping recent returns. While the broader market landscape remains complex, improving valuations and growth visibility heading into FY27 present a more balanced risk-reward scenario for investors.

Market Outlook and Valuation Assessment

According to Nitin Raheja, Executive Director and Head of Discretionary Equities at Julius Baer India, the Indian equity markets present a markedly different picture compared to early 2025. After an extended correction phase, valuations have become relatively more attractive, with the premium to other emerging markets contracting significantly.

Raheja expects markets to remain range-bound during the first half but anticipates the indices reaching new highs by year-end, delivering better returns than the previous year. This outlook is supported by the combination of corrected valuations and anticipated growth recovery for FY27.

Sector Rotation and Investment Narratives

The market has witnessed significant narrative shifts, with previous high-momentum sectors experiencing substantial corrections. EMS, defense, real estate, and solar sectors have all undergone price adjustments, moving away from previously overplayed themes.

Currently, the consensus narrative centers on the bottoming of interest rates and Net Interest Margins (NIMs), with banking stocks expected to lead earnings growth. However, Raheja cautions that this positive consensus may not adequately factor in the risk of further rate cuts, which could impact the sustainability of this theme.

Underappreciated opportunities may emerge in:

• EMS sector (after significant correction)
• Real estate
• Metals
• Capital goods sectors

Earnings Growth Expectations

The earnings landscape is expected to show sequential improvements, though the critical question remains whether the market can achieve the consensus expectation of 15-16% earnings growth. Any downgrade to these growth projections could result in muted market returns given current valuations.

Q3 Sector Performance Outlook

EMS Sector Analysis

The EMS space has experienced a significant sell-off, though the long-term story remains positive. Short-term demand and supply chain issues may impact growth rates, while elevated valuations had built in expectations for higher and linear growth numbers. Raheja believes the worst of the correction may be behind the sector, with stocks likely to react more to company commentary in upcoming quarters.

Budget Expectations and Policy Focus

With major tax changes completed, the Union Budget has evolved into primarily a policy document reflecting the government's growth strategy. Key areas of focus include:

Priority Areas:

• PSU disinvestment policy
• Increased capital expenditure
• Stimulating private sector capital spending
• Revenue enhancement through disinvestment

The government faces the challenge of maintaining fiscal consolidation targets while boosting economic growth above 8%. This requires addressing private sector risk aversion and encouraging increased capital spending to complement government initiatives in consumption demand stimulation through recent GST rate reductions.