Summary of this article
India 2026 markets: Balanced growth with stable inflation.
Earnings boost: Strong banks support recovery.
Investing focus: Quality stock picking over sectors.
Indian equities saw muted returns in 2025. Earnings growth broadly tracked nominal gross domestic product (GDP), but high starting valuations, geopolitical tensions, uneven global trade conditions, and sustained foreign portfolio outflows weighed on index performance and led to relative underperformance in comparison to other emerging markets. Liquidity conditions remained supportive and fiscal measures helped maintain macro stability, but markets lacked a clear directional trigger.
“With this background, 2026 is likely to be a more balanced year,” says Anand Shah, CIO – PMS and AIF Investments, ICICI Prudential AMC.
In 2026, India's economy appears to be robust, he adds. Shah says this is due to various factors at play.
Growth is likely to re-accelerate, supported by normalising inflation, improving real income, and the effects of previous fiscal and monetary actions. “A good demographic profile, a strong institutional framework, and a policy attitude that keeps stability and growth as top priorities are all good for the economy,” he adds.
Also, the monetary conditions are likely to remain supportive of growth, he says.
“With inflation settling into a stable range, policy support is expected to continue, giving the economy time to absorb earlier stimulus,” he says. According to him, corporate balance sheets are also much stronger than in previous years, allowing for selective borrowing and a gradual recovery in private capital spending.
Earnings May Pick Up in 2026
One major theme for 2026, according to Shah, is the potential for nominal GDP growth to resume.
“Recent periods have seen earnings growth lag below nominal GDP, indicating potential for catch-up if operating leverage improves. Financials, domestic cyclicals, and commodity-linked sectors are leading an improving cycle, as indicated by early indications of earnings stabilisation and selective upgrades,” he adds.
He says the banking system remains strong, with adequate capital and improving asset quality, positioning it well to support incremental credit demand. A gradual pickup in investment activity, alongside steady consumption (particularly in services) should provide a more durable earnings base than in the recent past, he adds.
Why Stock Selection Will Matter More Than Sectors
Shah says that as the Indian stock market enters a new stage, it is expected that broad themes and sector rotations will become less significant. From a valuation perspective, most industries are well-discovered, which reduces the potential for easy, theme-driven profitability.
As a result, selecting stocks based on management skill, business quality, and valuation discipline will become increasingly crucial. “Given this backdrop, the best companies for compounding value will be those that have strong governance, long-term competitive advantages, smart capital allocation, and the ability to grow faster than their industry as a whole,” he adds.
Preferred Sectors: Financials, Commodities, and Services
Shah maintains a positive outlook on the overall financial services sector, particularly private banks and capital market.
“We are also positive on the commodity sector, including building materials, metals, and mining. While we are positive on consumption (overall), we are particularly focused on services consumption rather than product consumption,” says Shah. He also anticipates that recovery will accelerate over the next two years, driven by the lagged effects of goods and services tax (GST) rate rationalisation, elections in key states through 2026-27, and potential wage increases from the 8th Pay Commission
Risk Factors
Shah also advises caution that could hurt the above outlook.
“Some of the main risks to this outlook include a more severe than expected global slowdown, renewed geopolitical tension, persistent trade frictions, and global risk-off episodes caused by valuation excesses in developed markets,” says Shah.
To conclude, Shah advises investors to focus on patience, selectivity, and valuation discipline for successful investment outcomes in 2026.
