Indian equity markets are predicted to rebound in 2026, driven by corporate earnings growth, according to multiple reports. After a year of underperformance relative to global peers in 2025, the Indian stock market is expected to regain momentum, fueled by improving macroeconomic conditions and a potential return of foreign investment.
Factors Driving the Revival
Several key factors are expected to contribute to the anticipated revival. Corporate earnings are projected to grow significantly, with Nifty earnings per share (EPS) expected to rise at a compound annual growth rate (CAGR) of around 16% over fiscal years 2026-2028. This is a substantial increase compared to the approximately 7% growth seen in the previous two years. This earnings growth is expected to be broad-based, extending beyond a narrow set of sectors as domestic demand improves and the benefits of policy measures materialize.
A supportive macroeconomic backdrop is also expected to play a crucial role. India's real GDP growth is projected to remain robust at around 7.5%, with benign inflation and a current account deficit below 1% of GDP. The Reserve Bank of India's (RBI) accommodative policies, including interest rate reductions and liquidity infusion, are expected to further support economic growth and market sentiment.
Foreign Investment Comeback
After significant outflows in 2025, foreign portfolio investors (FPIs) are expected to return to Indian equities in 2026. The conditions that led to the outflows, such as weak earnings momentum and global risk aversion, are easing. Attractive valuations, relative to other emerging and developed markets, and a stable currency outlook are also expected to lure foreign investors back. A potential burst of the AI-driven tech bubble in the US could also redirect attention to Indian equities.
Sectoral Outlook
Several sectors are expected to lead the market's recovery in 2026. Sectors linked to domestic investment and manufacturing, including capital goods, select industrials, and engineering firms, show promise due to strong order books and public capital expenditure. Financials, particularly banks, asset management companies, and insurance firms, are also expected to perform well. Other favored sectors include IT services, automobiles, and telecom.
Potential Risks
Despite the optimistic outlook, several risks remain. Global headwinds, such as a sharper-than-expected slowdown in growth, renewed inflationary pressures, and prolonged currency volatility, could impact risk appetite. Delays in concluding the India-US trade deal and a potential burst of the AI-driven tech bubble in the US are also key risk factors. Domestically, a surge in retail money into mid- and small-cap stocks has led to valuation excesses, which could result in sharp corrections if liquidity reverses.
Investment Strategies
Given the potential for volatility, experts recommend a selective approach to investing in 2026. Large-cap stocks are considered a safer bet due to reasonable valuations, stronger balance sheets, and clearer earnings visibility. Mid- and small-cap stocks require more careful selection. Theme-based investing, which focuses on broader economic and structural trends, is also recommended.
Overall, the Indian equity market is poised for a corporate earnings-led revival in 2026. While challenges remain, the improving macroeconomic conditions, potential return of foreign investment, and supportive policy environment provide a solid foundation for a stronger market performance.
