New Year Outlook from Motilal Oswal Financial Services | December 2026

As we enter 2026, Indian equity markets are trading close to all-time highs, with the Nifty ending CY25 with gains of nearly 10% on a year-to-date basis. After a phase of consolidation in 2025, we expect markets to deliver steady growth in CY26, supported by a recovery in corporate earnings and a gradual revival in private sector investments. Recent and forthcoming government policy measures should further aid this recovery. The Union Budget 2026 will be a key event to watch, as it is likely to set the direction for FY2026-27.

From a valuation standpoint, the Nifty-50's one-year forward P/E stands at 21.5x, around 4% above its long-period average (LPA) of 20.8x. In comparison, valuations in the broader market remain elevated. The Nifty Midcap-100 and Nifty Smallcap-100 are trading at P/E multiples of 28.3x and 25.9x, representing premiums of ~26% and ~50% over their respective long-term averages. This suggests that large-cap valuations are relatively more reasonable after recent consolidation, while midcap and small-cap stocks warrant a more selective approach, with a focus on companies that have strong balance sheets, sustainable cash flows and clear earnings visibility.

India's long-term structural growth story remains intact, supported by favourable demographics, rising digital adoption, increasing financialisation of household savings and continued reform momentum. We believe the government's ongoing policy initiatives will help reset the trajectory of corporate earnings over the medium term. Additionally, any resolution of the tariff stalemate with the US could act as an important external catalyst for markets.

From an investment perspective, we have a positive stance on large-cap stocks, particularly in sectors where earnings growth is strong and valuations remain reasonable. Financials continue to be preferred segment, backed by healthy credit growth, improving return ratios and strong balance sheets. We also remain positive on consumption-linked sectors such as consumer discretionary and automobiles, as demand recovery broadens and revenue growth improves.

Industrials and capital goods remain well positioned, benefiting from government-led reforms, infrastructure spending and localisation initiatives across manufacturing, electronics, data centres and energy transition-related segments. We are constructive on IT services from a medium-term perspective, as global technology spending is expected to recover gradually with stabilising macro conditions and increased focus on digital transformation, AI and efficiency-led adoption.

Healthcare and select pharmaceutical stocks offer defensive growth and portfolio stability, while digital and e-commerce themes continue to remain attractive due to strong demand trends, improving balance sheets and long-term compounding potential. However, stock selection remains critical in these segments.

2025 proved to be a year of consolidation and recalibration for Indian equity markets, marked by intermittent volatility and global headwinds. The Nifty entered the year in correction mode after touching record highs in September 2024, with the correction extending until early April 2025 amid the imposition of trade tariffs by the US. Market movements through the year were largely influenced by global trade dynamics, persistent FII outflows, currency volatility and evolving geopolitical developments. Despite a relatively stable domestic macroeconomic backdrop, moderation in earnings growth across select sectors-especially in small-cap stocks-kept markets range-bound. Towards the end of the year, however, the Nifty recovered most of its losses and went on to make new record highs, reaching 26,325 on December 1st 2025. Broader markets displayed mixed trends, with midcaps showing relative resilience, while small-caps witnessed sharper bouts of volatility. After two years of a sharp rally-when the Nifty Midcap100 delivered returns of 46% and 24% in 2023 and 2024, respectively, and the Nifty Smallcap100 generated 56% and 24% over the same period-2025 turned out to be a year of consolidation for the broader market. The Nifty Midcap100 managed a modest ~6% annual return, while the Nifty Smallcap100 declined by ~-6%.

Several domestic and global factors shaped market performance in 2025. Monetary easing by the Reserve Bank of India (RBI) emerged as a key stabilising force. The RBI adopted a calibrated approach, balancing growth support with inflation vigilance. During the year, it implemented four repo rate cuts amounting to a cumulative 125 basis points, bringing the policy rate down to 5.25%. This easing cycle was supported by low inflation and resilient economic growth.

In addition to rate cuts, the RBI focused on improving liquidity conditions. A 100 basis point reduction in the Cash Reserve Ratio (CRR) was announced in Jun'25 and implemented in four tranches, releasing around ₹2.5 lakh crore of primary liquidity. The RBI also conducted multiple open market operations, including a ₹1 lakh crore government securities purchase in December 2025, to inject durable liquidity into the system.

India's economic fundamentals remained strong, with GDP growth of 8.2% in Q2 FY26 driven by consumption, while the latest CPI inflation was recorded at 0.71% in Nov'25, remaining below RBI's 2% target, supported by falling food prices and GST rationalization. The Indian Rupee experienced intermittent weakness due to global dollar strength and FPI outflows but was supported by timely RBI interventions.

Policy priorities also evolved during the year, with the government shifting focus from capital expenditure towards boosting consumption. Measures such as income tax rebates, a comprehensive GST overhaul and the proposed implementation of the 8th Pay Commission are aimed at reviving domestic demand and supporting household spending. GST reforms simplified the earlier four-tier structure into a two-tier system of 5% and 18%, with a 40% demerit rate on select sin and luxury goods, helping improve compliance, enhance efficiency and bolster consumption sentiment amid global trade uncertainties.

In terms of earnings, Nifty50 reported single-digit growth, with PAT rising just 2% YoY in Q2 FY26, marking the sixth consecutive quarter of muted earnings growth. This period reflected valuation-led consolidation rather than earnings-led expansion. While concerns over weak earnings dominated the first half of FY26, Q2 results showed improvement across several sectors, including OMCs, Telecom, Metals, Technology, NBFCs (lending), Cement and Capital Goods. Consequently, Nifty EPS estimates were upgraded by 1.2% and 0.5% for FY26E and FY27E, respectively, reflecting expectations of an earnings turnaround.

Institutional flows also underwent a structural shift during the year. Strong domestic inflows and a buoyant primary market resulted in DII holdings surpassing FII holdings in Nifty-500 companies for the first time in March 2025, with this trend strengthening further by September 2025. In contrast, FIIs remained net sellers through most of the year, with cumulative outflows of around ₹2.31 lakh crore as of 20 December 2025, including primary market investments. FII selling was driven by rising US bond yields, a stronger US dollar and capital reallocation towards developed markets and regions benefiting from AI and semiconductor-led growth, such as China, Taiwan and South Korea. Muted corporate earnings growth in India also contributed to outflows from sectors like IT and FMCG. However, selling pressure moderated towards the end of the year, with FIIs turning net buyers on several days in December 2025. Looking ahead, expectations of US Federal Reserve rate cuts in 2026 could support renewed FII inflows into emerging markets, including India.

Overall, CY2025 was a year of consolidation marked by volatility and global uncertainty, but it also helped reset valuations and investor expectations. As we move into 2026, improving earnings visibility, supportive policy measures and the potential turnaround in FII flows create a favourable backdrop for Indian equities. We remain optimistic on the long-term compounding potential of Indian markets and advise investors to stay disciplined, focus on quality businesses and use market volatility as an opportunity to build exposure fundamentally strong businesses aligned with India's structural growth themes.

Source : Equity Bulls

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