Stock Markets in 2026: Valuations and IPO Risks Investors Should Track

Fundamentally, equity markets are entering 2026 on a stronger domestic footing, but that does not make investors immune to near-term risks that could derail momentum or create temporary hiccups along the way.

ICICI Prudential Mutual Fund, in its Annual Outlook 2026, flags two near-term risks that stock market investors should keep a close eye on while navigating the Indian markets.

Risk 1: Valuations Running Ahead of Growth

Global equity valuations have steadily climbed over the last three years. This trend is most visible in AI-led (artificial intelligence) and technology-driven markets like the US, where stock prices have moved faster than underlying economic growth. The gap between valuations and fundamentals has widened, raising the risk of sharp corrections.

US markets, in particular, are being powered by optimism around  AI and the dominance of the so-called Magnificent Seven (Mag-7) stocks. Their growing influence is clearly reflected in index concentration and valuations.

The weight of the Magnificent 7 stocks in the S&P 500 Index has almost tripled over the past decade, rising from about 11 per cent in 2015 to around 32 per cent by 2025. Much of this increase has been driven by Nvidia, an American tech company and other large tech stocks, making the index far more concentrated than in the past.

In absolute terms, the dominance is even starker. The combined market capitalisation of the Mag-7 stands at around $19.4 trillion which is comparable to the GDP of China and significantly larger than the GDPs of major economies such as Germany, India, and Japan. Any meaningful correction in this narrow but influential pocket of the market could have ripple effects across global equities, cautions the Annual Outlook 2026 Report by ICICI Pru Mutual Fund.

Risk 2: Supply-Heavy Equity Landscape — Too Many IPOs, Too Little Alpha

Strong liquidity and elevated valuations have kept the domestic Initial Public Offering (IPO) pipeline busy. Primary market fundraising has historically moved in cycles, but the latest surge stands out, says the report. After a pickup in FY20, activity rose sharply again in FY25, driven largely by IPOs. Preferential issues and Qualified Institutional Placement (QIPs) continue to play supporting roles, but IPOs are clearly leading the current cycle.

This supply pressure is expected to continue. DRHP filings with SEBI have climbed steadily and hit a new high in 2025, pointing towards a strong pipeline of companies lining up to tap the markets even as listing outcomes have become more unpredictable.

Historical trends show that IPO returns have moderated meaningfully. Median one-month post-listing returns, which were strong in 2020 and 2023, have slipped to low single digits by 2025. At the same time, the proportion of IPOs delivering negative one-month returns has risen sharply from just 12 per cent in 2020 to around 40 per cent by 2025. Absorbing fresh supply in such an environment is becoming increasingly challenging.

The base block of the Indian economy, as mentioned in the report, is getting stronger with earnings downgrade easing, fiscal support (GST and Direct Tax cuts), improving liquidity, undervalued Real Effective Exchange Rate (REER), time and price correction in market and long term macros remaining stable.

“The wrong pull, however, such as US AI optimism, IPO oversupply in the market, high global valuations etc. can still shake the structure,” says the report. Thus, better balance gives a room to build. However it is prudent to remain cautious, it adds.