The Indian stock market began 2025 with caution, but is expected to rebound in 2026. Despite challenges such as the global tariff war and elevated valuations, India's large-cap stocks managed a decent 10% return, while small-caps underperformed.
2025 Review
The year 2025 saw a decline in domestic earnings growth driven by demand moderation and elevated premium valuation. Foreign Institutional Investors (FIIs) adopted a 'sell India and buy China' strategy, impacting overall market liquidity and disproportionately affecting small-cap stocks.
2026 Outlook
However, 2026 is likely to be better than 2025, as many external risks have been played out and tested by the market. India is likely to sign a trade agreement with the US in 2026, which is expected to boost the Indian Rupee. Broad corporate earnings have been better in Q2, and expectations for Q3 remain robust, supporting mid- and small-cap segments.
Key Risks and Opportunities
- Pending US-India trade deal
- Elevated Fed rates
- Russia-Ukraine conflict
- Potential reversal of the yen carry trade
- Persistently high valuations
Despite these risks, the volatility associated with them has reduced. The US is in talks with multiple countries to finalize a deal, and midterm elections are expected to pressure the government to reduce inflation. The market anticipates further rate cuts and moderation of global risks in 2026.
Investment Strategy
For 2026, a multi-asset strategy with a 60% allocation to large-cap, 15% to mid-cap, and 10% to small-cap is recommended. Debt allocation should be reduced to 10%, and gold to 5%. The target for Nifty50 is 29,150 for December 2026, a return of ~12%.
Remember, this is perspective, not prediction. Do your own research and consult with certified experts before making any investment decisions.