Shailendra Kumar of Narnolia Financial Services expects a two-year rally in Indian stocks, driven by a projected 17% earnings growth rate through FY28. While optimistic, the outlook identifies four key risks including potential US Fed rate hikes and global geopolitical tensions that investors should monitor alongside sectoral trends in consumption and IT.
Shailendra Kumar, Chief Investment Officer at Narnolia Financial Services, projects a positive trajectory for Indian equities over the next two years. His outlook is based on a recovery in corporate earnings, with a compound annual growth rate (CAGR) estimated at 17% between fiscal year 2026 and fiscal year 2028. This forecast follows a period where earnings growth was limited to approximately 5%. Specifically, he estimates earnings growth of 15% for FY27, accelerating to 19% in FY28, which may allow for higher valuation multiples in the broader market.
Sector Preferences and Consumption Trends
Despite the overall bullish sentiment, the outlook for the consumption sector remains mixed. The expectation is that India’s economic growth will continue to be driven primarily by investment, supported by both government spending and a gradual increase in private capital expenditure. Within the consumption space, the focus remains on automobiles, banks with a strong retail presence, and specific consumer services. Conversely, there is a more cautious stance on consumer staples and traditional durables, where earnings growth is expected to remain constrained in the near term.
Strategic Shifts in IT and PSU Holdings
For the IT sector, the transition toward enterprise AI customization is identified as a critical long-term factor. This structural shift is impacting roughly 20-30% of legacy revenue streams, a transformation expected to persist through 2027. While short-term rallies in IT stocks may appear, the long-term performance will likely depend on how effectively individual companies adapt their business models to AI integration.
Regarding public sector undertakings (PSUs), there has been a notable shift in the government's approach. After a period of high divestment activity in Q1FY27, the urgency for stake sales may decrease as energy prices moderate. The government appears to be moving toward a strategy of enhancing the intrinsic value of PSUs rather than pursuing aggressive privatization, with the notable exception of specific entities like IDBI Bank.
Risks to the Bullish Outlook
While the current forecast assumes continued growth, four specific risks are flagged that could influence market stability. These include the possibility of interest rate hikes by the US Federal Reserve, a potential slowdown in global investment related to artificial intelligence, geopolitical tensions or trade tariff escalations, and the weather impact of a severe El Niño event. Although these risks are currently viewed as manageable, they represent variables that could pressure portfolio performance if they intensify. Investors will need to monitor how these macro factors develop, as they may impact global liquidity and corporate cost structures in the coming quarters.