- AI is a secular growth driver, but returns are wildly dispersed – diversification is essential.
- Q3FY26 earnings show a broad‑based profit surge, giving the market a new floor.
- Budget‑induced STT hikes and higher borrowing have squeezed liquidity, muting the rally.
- Gold’s outperformance is a currency hedge, not a wealth‑creation engine.
- REITs, InvITs and global exposure can boost risk‑adjusted returns for Indian retail investors.
You missed the AI wave—and the market’s next surge is right behind it.
Why AI Remains a Secular, High‑Growth Theme for Indian Investors
Riddhiman Jain, Managing Director of Waterfield Advisors, flags artificial intelligence as a structural megatrend. The technology is reshaping productivity, automating processes and feeding data‑driven decision‑making across every sector—from banking to pharma. Because AI adoption is still in its early stage, valuations vary dramatically; a pure‑play AI stock can trade at 30‑40 times forward earnings, while an Indian IT service that merely offers AI consulting may sit at 12‑15 times. The rule of thumb for investors is simple: capture the upside through diversified exposure—either via global AI ETFs, high‑quality Indian IT names, or a blend of both.
Globally, the AI theme has spurred a wave of capital inflows into data‑centre REITs, GPU manufacturers and cloud providers. In India, the listed pipeline is thinner, but the unlisted infrastructure space is humming with private‑equity‑backed builds. This creates a dual‑play: equity exposure to IT services like Infosys and TCS for indirect AI upside, and allocation to listed REITs (e.g., Embassy Office Parks) or private data‑centre funds for the compute‑side of the equation.
What the Q3FY26 Earnings Surge Means for Market Momentum
Corporate India has finally broken out of a prolonged earnings slump. Median sales growth for firms with market caps above ₹5,000 crore climbed from roughly 9‑9.5% in Q1FY26 to 11‑12% in Q3FY26. More striking is the acceleration in profitability: operating profit grew 15‑16% versus 10‑11% earlier, while net profit (PAT) jumped to 17‑18% from 12‑13%.
Mid‑cap and small‑cap companies are outpacing large caps, delivering 18‑20% PAT growth. This breadth of participation is a classic sign of a sustainable earnings cycle, reducing the risk of a sector‑specific correction. For investors, the earnings lift creates a tangible “fundamental floor” that can absorb short‑term volatility.
Technical analysts will note that the Nifty’s 200‑day moving average is now acting as a support level, while the relative strength index (RSI) has moved out of oversold territory, hinting at a potential trend reversal. In short, the earnings data supply the fuel that the market has been lacking.
How the Union Budget 2026‑27 Dampened the Rally – Lessons for Liquidity
The Union Budget introduced three headwinds that muted market enthusiasm. First, the Securities Transaction Tax (STT) was raised for the third time since 2023, directly chipping away at high‑frequency trading profitability and overall market liquidity. Second, the fiscal plan targets a gross borrowing of ₹17.2 lakh crore—well above market expectations—pressuring bond yields upward and tightening cash conditions for equities.
Finally, the budget’s focus on fiscal consolidation rather than stimulus left investors without a short‑term catalyst. Even the US‑India trade deal, which eliminated certain tariffs, came with a hidden cost: the cessation of discounted Russian crude imports, raising input costs for energy‑intensive firms like Reliance Industries and oil marketing companies.
These fiscal moves underscore a key investment principle: liquidity matters as much as earnings. When cash is scarce, even solid fundamentals can struggle to translate into price appreciation.
Gold vs. Equities: Why You Should Not Overweight the Shiny Metal
Over the past two decades, gold has outperformed the Nifty, but the edge comes largely from rupee depreciation against the dollar. In essence, gold acts as a hedge against currency risk, not as a driver of wealth creation.
Equities, by contrast, give investors ownership in businesses that generate cash flows, reinvest earnings, and benefit directly from India’s GDP expansion. During economic upcycles, gold tends to stagnate while equities capture the surge in corporate profits. The prudent stance is to keep gold as a modest diversifier—perhaps 5‑10% of a portfolio—to buffer volatility, while maintaining equities as the core growth engine.
Beyond Stocks and Gold: REITs, InvITs, and Global Diversification
Retail investors should widen their asset mix to include Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). These vehicles provide regular income via distribution yields of 6‑8% and have shown resilience in a rising‑rate environment.
Additionally, a 20‑30% allocation to global equities—especially in AI‑centric names like Nvidia, Microsoft, and Alphabet—adds geographic diversification and shields the portfolio from rupee depreciation. Indian investors can access these stocks via international brokerage accounts or GIFT‑City‑based platforms that offer regulated, tax‑efficient overseas exposure.
For high‑net‑worth individuals, selective exposure to performing credit and private‑equity funds can further enhance returns, but manager selection is critical. A fund‑of‑funds structure can mitigate concentration risk and provide institutional‑grade due diligence.
Investor Playbook: Bull and Bear Cases Across Themes
Bull Case
- AI and data‑centre exposure via diversified global ETFs or top‑tier Indian IT services.
- Continued earnings momentum in Q3FY26 translating to higher multiples for mid‑caps.
- Positive FII inflows re‑establishing liquidity, supporting a “double‑engine” rally.
- Strategic allocation to REITs/InvITs for stable income and lower correlation with equities.
Bear Case
- Persistently high STT and elevated government borrowing squeezing market liquidity.
- AI valuation dispersion leading to potential corrections in over‑priced pure‑play stocks.
- Geopolitical shocks that could revive gold’s safe‑haven appeal and pull capital out of equities.
- Delayed fiscal stimulus limiting short‑term upside despite earnings improvement.
Balancing these scenarios, a prudent portfolio might allocate 55‑60% to diversified Indian equities, 10% to gold as a hedge, 10‑15% to REITs/InvITs, and 20‑25% to global AI‑focused assets. Re‑balancing quarterly in line with earnings releases and FII flow data will help lock in gains while managing downside risk.