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Motilal Oswal Forecasts Indian Equities to Rebound in CY26 Fueled by Earnings Growth
Motilal Oswal's India Valuations Handbook presents a constructive outlook for Indian equities in calendar year 2026, projecting a rebound driven by a significant revival in corporate earnings. The brokerage anticipates that improving earnings prospects, coupled with resilient domestic macroeconomic conditions and a more stable geopolitical landscape, will propel the market. Valuations are currently seen as reasonable, trading close to their long-period averages, suggesting that any acceleration in earnings growth could lead to a market rerating.
The Core Issue
The brokerage highlights that concerns regarding lower nominal GDP growth materially impacting corporate profit growth are likely overstated. Motilal Oswal emphasizes that corporate earnings are influenced by a multitude of factors extending beyond headline economic expansion. The Nifty index is currently trading at a 12-month forward Price-to-Earnings (P/E) ratio of 21.2x, which is closely aligned with its long-period average of 20.8x, indicating that current market valuations are not excessively high.
Financial Implications and Sector Preferences
Reflecting its optimistic view, Motilal Oswal has upgraded its stance on Indian Information Technology (IT) services to mildly overweight within its model portfolio. This strategic shift was funded by trimming exposure to the consumer discretionary and healthcare sectors. For calendar year 2026, the brokerage's preferred sectors include diversified financials, IT services, automobiles, telecom, and capital goods. Conversely, sectors like energy, metals, and utilities are identified as key underweights.
CY25 Review: A Decade of Gains Amidst Volatility
The positive forecast for CY26 arrives after Indian equities concluded calendar year 2025 with their tenth consecutive year of gains. The Nifty index finished CY25 up by 10.5 percent, reaching a fresh lifetime high of 26,326 during the year before settling at 26,130. However, December proved to be a volatile month, breaking the Nifty's three-month winning streak with a marginal 0.3 percent month-on-month decline.
Market Performance Divergence
Performance across different market segments showed considerable divergence in CY25. Over the past twelve months, large-cap stocks delivered an 11 percent return, while mid-caps gained 6 percent. Small-cap stocks, however, experienced a decline of 6 percent, indicating valuation corrections in the broader market. Despite this recent divergence, over a five-year period, mid-caps and small-caps have significantly outperformed large-caps, posting Compound Annual Growth Rates (CAGRs) of 23.7 percent and 20.1 percent, respectively.
Sectoral Leadership and Stock Highlights
Sectorally, Public Sector Undertaking (PSU) banks (+30 percent), metals (+29 percent), financials (+27 percent), automobiles (+23 percent), and private banks (+16 percent) were the leading performers in CY25. At the individual stock level, Shriram Finance, Maruti Suzuki, Eicher Motors, Hindalco Industries, and SBI Life Insurance emerged as top performers. Conversely, Trent, Tata Consultancy Services, Tata Motors, HCL Technologies, and Power Grid Corporation of India were among the notable laggards.
Domestic Flows Dominate as FIIs Retreat
Motilal Oswal underscored the increasing dominance of domestic investors in CY25. Domestic Institutional Investor (DII) equity inflows reached a record $90.1 billion, a substantial increase from $62.9 billion in CY24. Over the past decade, DIIs have cumulatively invested approximately $255.8 billion, with only one year of net outflows since 2015. In stark contrast, Foreign Institutional Investors (FIIs) recorded their highest-ever equity outflows, amounting to $18.8 billion in CY25. The market's resilience despite these outflows highlights a structural shift towards domestic capital ownership.
Global Comparison and Valuation Metrics
India experienced an underperformance relative to several global peers in December, including the United States, while markets like South Korea, Taiwan, and Germany posted gains. Over the last twelve months in US Dollar terms, the MSCI India Index saw a 3 percent rise, lagging behind the MSCI Emerging Markets Index's impressive 31 percent gain. However, on a 10-year basis, the MSCI India Index has outperformed the MSCI Emerging Markets Index by a significant 53 percent. Valuations across Indian sectors show that approximately two-thirds trade at a premium to their long-term averages. Sectors like capital goods, PSU banks, Non-Banking Financial Companies (NBFCs), oil & gas, metals, and utilities are trading above historical norms, whereas private banks and retail sectors are at a discount. The market capitalization-to-GDP ratio stands at 133 percent of the estimated FY26 GDP, which is considerably above its long-term average.
Future Outlook
With valuations approximating historical norms and a robust expectation for improved earnings growth, Motilal Oswal is confident that Indian equities are poised for an earnings-led rebound in calendar year 2026. The brokerage suggests that strategic sector positioning and meticulous stock selection will be key drivers of returns in the coming year.
Impact
This news directly impacts Indian stock market investors by providing a forward-looking perspective and specific investment recommendations from a prominent brokerage. It can influence investment decisions, sector allocation, and overall market sentiment. The emphasis on earnings growth and reasonable valuations suggests a potentially positive environment for equity investments.
Impact Rating: 8/10
Difficult Terms Explained
- P/E Ratio (Price-to-Earnings Ratio): A valuation metric that compares a company's stock price to its earnings per share. It indicates how much investors are willing to pay for each dollar of earnings.
- Nifty: A benchmark stock market index in India, representing the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange (NSE).
- DII (Domestic Institutional Investor): Investment funds based in India, such as mutual funds, insurance companies, and pension funds, that invest in the Indian securities market.
- FII (Foreign Institutional Investor): Investment funds based outside India that invest in Indian securities. Also known as Foreign Portfolio Investors (FPIs).
- CAGR (Compound Annual Growth Rate): The mean annual growth rate of an investment over a specified period of time longer than one year, assuming that profits were reinvested at the end of each year.
- Market Capitalization-to-GDP Ratio: A valuation measure for a country's stock market, calculated by dividing the total market capitalization of all listed companies by the country's Gross Domestic Product (GDP). It indicates whether a stock market is overvalued or undervalued relative to the size of the economy.
- Nominal GDP: Gross Domestic Product measured at current prices, without adjusting for inflation.