Anubhav Mukherjee, co-founder and fund manager at Prescient Capital, believes a broad-based rally is unlikely in the Indian stock market in 2026 due to overvaluations in several pockets. In an interview with Mint, he says he expects healthy earnings in Q3 FY26. “Benchmark Nifty 50 and Nifty 500 may deliver double-digit revenue and earnings growth in Q3,” he says. Furthermore, he also shares insights on the equity investment strategy for 2026.
How does the market set-up look to you at this juncture? Is it ripe for a strong rebound in 2026?
We feel that Indian equities will do well in 2026, though it will not be a broad-based rally as several pockets of overvaluation exist in the market.
From a macro perspective, the Indian economy is in a very healthy state entering 2026.
In 2025, three important developments in the form of income tax cuts, GST reductions, and a significant decline in interest rates provided meaningful support to the economy.
These measures together should drive strong earnings from Q3FY26 and drive a rebound in the performance of Indian equities.
However, some sectors/stocks with frothy valuations will not do well, so sound stock selection will be key to enjoying healthy returns.
Earnings season is near. What are your expectations for Q3 numbers?
Earnings growth should rebound meaningfully from Q3FY26, driven by multiple factors like GST & income tax rate cuts, low interest rates, as well as the low base of the same quarter last financial year.
We expect benchmark indices like Nifty 50 and Nifty 500 to deliver double-digit revenue and earnings growth.
In Q3FY25, revenue growth had hit a 16-quarter low for Nifty 50 (4.5% YoY) and a 5-quarter low for Nifty 500 (4.6% YoY), so the base is favorably low for Q2FY26.
Infra spending by the government has grown meaningfully year-on-year in Q3FY26, which should help the capital goods and infra sectors.
Supportive measures by the RBI, such as multiple interest rate cuts and improved liquidity from CRR cuts, have helped boost credit growth, consumption, and other economic indicators.
However, the earnings growth will not be very broad-based as some sectors are expected to meaningfully outperform.
What are the sectors that may outperform next year?
Certain sectors like auto and auto ancillaries, power equipment, banks, mid/small cap IT/ITES are expected to outperform in 2026.
The auto sector has probably been the biggest beneficiary of both GST and interest rate cuts, as meaningful price cuts have improved affordability, while lower EMIs also help drive purchases.
This is already showing up in strong auto sales growth reported for October and November.
Auto ancillaries, especially, are benefitting from the premiumisation trend in the Indian auto industry over and above factors like GST / bank interest/income tax rate cuts.
Power equipment like transformers, diesel gensets, smart meters, other generators, etc, are witnessing multi-year structural tailwinds due to factors like global grid modernization, burgeoning power demand from data center capacity addition, need for huge transmission capacity addition due to renewable generation capacity addition, etc.
Select IT / ITES companies are also expected to continue doing well in 2026, driven by their strength and focus on AI, which is witnessing strong spending by enterprises.
Lastly, banks are expected to do well in 2026 as it is one of the most reasonably valued sectors currently.
Also, bank earnings should improve from Q2FY6 due to improving credit growth on the back of multiple liquidity measures from the RBI, as well as margin improvement due to lower cost of funding.
What should be our equity investment strategy for 2026? Should we trim exposure to small-caps?
In 2026, investors should be selective in their stock selection, especially avoiding companies with frothy valuations as well as those that have poor cash generation due to factors like a stretched working capital cycle.
The focus should be on companies with attractive financials in sectors mentioned above that have a good growth outlook for 2026, but are available at reasonable valuations.
Contrary to the current popular belief that small and mid-cap companies are expensive, there is a large set of 3,000+ listed companies beyond the large cap space (top 100 companies by market cap) in which several niche, fast-growing companies are available now at attractive valuations.
Our belief is that investors should not look at valuations of benchmark small / mid-cap indices, and not blindly follow the current narrative painting all small/micro caps as expensive.
In the broader space of companies beyond the top 250 market cap companies, there has been a significant drawdown from all-time highs, and several good businesses are available at attractive valuations.
Our belief is that investors should focus on this space in 2026.
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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.
