Ajay Menon, MD and CEO of Wealth Management at Motilal Oswal Financial Services Limited (MOFSL), believes the performance of the Indian stock market in 2026 will be driven by earnings rather than valuation. In an interview with Mint, Menon said that large caps appear to be better positioned as the earnings cycle improves, while SMIDs (small and mid-caps) require sharper stock selection due to stretched valuations. Apart from the stock market outlook, Menon shared his views on earnings prospects, the impact of the end of the Russia–Ukraine war, and a delayed India-US trade deal. Edited excerpts:
What key factors will drive the Indian stock market in 2026?
After a year of consolidation in 2025, Indian equity markets are likely to enter a more constructive phase in 2026, supported by an improvement in corporate earnings growth and a favorable domestic policy environment.
The earnings slowdown over the past five quarters appears to be nearing a bottom, with growth expected to gradually broaden beyond a narrow set of sectors as domestic demand improves, operating leverage plays out, and the benefits of GST rationalization begin to reflect in profitability.
On the macro front, monetary easing, liquidity infusion, and continued policy support are expected to be the primary drivers, creating a more supportive backdrop for consumption.
Government spending is likely to normalize, providing incremental demand support and aiding a measured recovery in private investment.
Externally, any easing in global financial conditions or reduction in trade-related uncertainty could further support equity markets.
Looking ahead, 2026 appears to be positive, supported by an improving earnings cycle, benign interest rates, and a policy backdrop that favors investment and credit expansion.
Do you expect an earnings revival next year? What supports this view?
A gradual revival is expected next year, supported by policy initiatives and a favorable base.
After five consecutive quarters of downgrades, aggregate earnings revisions have turned positive, with FY26 PAT upgraded by nearly 2%—the first upgrade since Q1FY25—led by mid-caps (nearly 3%) and aided by large-caps (nearly 2%), signaling improving momentum. RBI rate cuts and liquidity infusion, along with support of measures by the government, will help reset the trajectory of corporate earnings, as domestic reforms are expected to continue.
Additionally, any resolution of the tariff stalemate will be a key external catalyst. A low FY25 PAT base of nearly 6% YoY further supports the outlook.
We forecast Nifty earnings growth of 12% and 15% YoY in FY26 and FY27, respectively, which appears reasonably well placed.
How could a delay in an India–US trade deal until March affect market sentiment?
A delay in finalizing a trade agreement with the US until March is likely to keep near-term market sentiment cautious, particularly for export-oriented sectors sensitive to global trade flows.
However, markets appear largely conditioned to the extended negotiation timelines, and in the absence of adverse trade actions or tariff escalation, the impact is likely to remain sentiment-driven rather than fundamentally disruptive.
Trade policy uncertainty contributed to intermittent volatility in 2025; however, strong domestic macro fundamentals helped Indian markets remain resilient.
In parallel, the government has actively pursued trade diversification, concluding trade agreements with the United Kingdom and Oman, and most recently closing negotiations with New Zealand.
This proactive approach to expanding India’s FTA network should help cushion external trade shocks and partially offset delays in finalizing a comprehensive trade agreement with the United States.
Do you think an end to the Russia–Ukraine war would be a key positive for India?
An end to the conflict between Russia and Ukraine would be largely positive for India, though the benefits would be indirect and macro-led.
A resolution would reduce uncertainty in global energy and commodity markets, which have faced persistent volatility due to prolonged geopolitical tensions, sanctions and disrupted trade flows.
Lower geopolitical risk premia would help keep crude oil prices more stable, supporting India’s inflation outlook and current account balance, while easing pressure on input costs across the economy.
It would also help stabilize broader commodity markets and reduce external sector risks.
While India’s domestic demand has remained resilient, the removal of this geopolitical overhang would improve the global operating environment and support a more confident investment climate as markets move into 2026.
When do you expect sustainable FII buying to return?
Sustainable foreign institutional investor buying would depend on a mix of domestic and global factors.
On the domestic front, key triggers include a recovery in corporate earnings, currency stability, and positive signals from the Union Budget, particularly higher capital expenditure, which could improve investor confidence.
Globally, a dovish monetary stance in the US and EU would be supportive for emerging-market flows.
In contrast, further rate tightening by Japan could trigger an unwinding of yen carry trades, adding pressure on foreign flows into emerging markets, including India.
What is your view on current market valuations?
Market valuations show a clear divergence between large caps and the broader market.
Large-cap valuations appear comfortable after a year of consolidation, with the Nifty 50 trading close to its long-term average multiple, reflecting a better balance between prices and improving earnings visibility.
On a one-year forward basis, the Nifty-50 is trading at 21.5 times, which is marginally above its 10y average of 20.8 times, suggesting limited valuation excess at the headline index level.
In contrast, valuations in the broader market remain elevated. The Nifty Midcap-100 is trading at roughly a 25% premium to its long-period average, while the Nifty Smallcap-100 trades at around a 50% premium.
While mid-cap earnings momentum remains relatively stronger, supporting a selective approach, earnings visibility in small caps is weaker, making current valuations harder to justify.
Overall, market performance is likely to be earnings-driven rather than valuation-led, with large caps better positioned as the earnings cycle improves, while SMIDs require sharper stock selection.
Could a “reverse AI” cycle support Indian markets next year?
India’s relative underperformance in 2025 was partly due to limited exposure to the early phase of the global AI cycle, which was driven largely by hardware and platform-led capital expenditure.
Indian technology companies remained in a transition phase, with AI spending largely focused on pilots and early use cases.
Looking ahead, a “reverse AI” or adoption-led phase could begin to emerge.
As global AI spending shifts from infrastructure build-out to enterprise-level implementation and optimization, demand is expected to move toward software and services.
Indian IT services companies are well-positioned in this phase, with AI-related revenues likely to start contributing more meaningfully over the coming quarters.
This shift could help narrow performance gaps and support India’s participation in the broader AI theme.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
