Summary of this article
Indian equities anticipate a 2026 recovery driven by double-digit earnings growth and 8.2 per cent GDP expansion.
A Goldilocks environment of low inflation and RBI rate cuts provides a stable foundation for increasing investor confidence.
Strong domestic flows exceeding Rs 29,000 crore monthly via SIPs continue to support the market despite previous foreign investor sell-offs.
The calendar year 2025 was characterised by high volatility amid major geopolitical upheavals and macroeconomic headwinds. Weathering the challenges, the Indian stock market managed to finish the year with gains. However, compared to the global markets, the Indian stock market gave lower returns, according to a report by asset management firm, ASK Investment Manager.
The report compared the dollar-based returns generated by the markets of various countries up to the end of 2025. The Indian markets gave the lowest dollar-adjusted returns compared to other major markets such as Korea, Mexico, Germany, Europe, UK, Japan, France, China, Indonesia, Australia and the US.
The report showed that while the Indian market generated 5 per cent returns in 2025 compared to the strong double-digit returns of other markets, 2026 is going to be different for the Indian stock market. Here’s a look at some of the key tailwinds which are expected to lift the stock market in 2026:
5 Tailwinds Set To Impact The Stock Market In 2026
The underperformance of the Indian stock market followed US President Donald Trump’s imposition of trade tariffs, subdued corporate earnings, and the selling of Indian equities by foreign investors.
However, factors such as recovery in earnings, resilient macroeconomic growth and an easing interest rate cycle are set to push the market towards a recovery in 2026.
Earnings Recovery
The shoots of India Inc’s earnings recovery became visible in the second quarter of FY 2026-26 itself. While earnings growth was muted in Q1, India Inc. posted strong double-digit earnings growth in Q2 FY26. In Q2 FY26, the sales of NSE 500 companies surged by 6.7 per cent year-on-year (y-o-y). On the other hand, the profit-after-tax (PAT) and earnings before interest tax depreciation and amortisation (Ebitda) grew by 15 per cent and 13.4 per cent, respectively.
The asset management firm believes that the improved profitability and stable demand can support the momentum of earnings growth in the rest of FY26. It said H2 FY26 is expected to be bolstered by rate-cut transmission, festival season consumption, rural demand normalisation, and sustained public sector capital expenditure.
Robust Macroeconomic Growth
In Q2 FY26, India’s gross domestic product (GDP) growth increased to a six-quarter high of 8.20 per cent. This is greater than 5.60 per cent in the corresponding quarter of the preceding fiscal.
Fitch Ratings also upgraded India’s GDP growth estimates for FY26 to 7.40 per cent, from 6.90 per cent, citing enhanced consumer spending and easing GST reforms. The strong macroeconomic growth is likely to boost the stock market’s recovery in 2026 by providing a stable foundation for increasing investor confidence, the report said.
"Goldilocks" Environment
In 2025, the Reserve Bank of India (RBI) reduced the benchmark lending rate by 125 basis points (bps). Notably, RBI Governor Sanjay Malhotra recently mentioned in an interview with Bloomberg that interest rates are expected to remain low for a long period of time.
ASK IM mentioned that India is enjoying a period of “Goldilocks Environment” wherein the economy is witnessing robust growth and low inflation at the same time. The Goldilocks Environment is expected to support earnings growth and retail spending, leading to a recovery in the Indian stock market.
"If that is so, barring shocks on the supply side, the weather, geopolitics or something else, we're in for a long period of low policy rates," Malhotra told Bloomberg.
Strong Domestic Flows
Foreign institutional investor (FII) sell-offs and an increasing current account deficit contributed to the rupee‘s decline in 2025 to a record low, breaching the Rs 90 per USD level mark. However, the domestic institutional investors (DIIs) continued to invest in Indian equities. DIIs have invested $86 billion into Indian equities in 2025.
The asset management firm expects inflows to remain robust with the systematic investment plan (SIP) momentum showing no signs of weakening. The monthly SIP book is currently close to the all-time high, with the flows staying above the Rs 29,000 crore mark hit in October and November 2025.
Global Interest
ASK IM mentioned in the report that foreign investors have shown interest in India’s financial services space – striking deals worth $15 billion in 2025. These deals indicate the long-term confidence in India’s financial services space. Additionally, an uptick in credit growth and relatively healthier balance sheets are expected to push the financial sector into a promising phase, it said.
Sectors Poised For Growth In 2026
The report further said that it favours large-caps on account of their relatively attractive valuation compared to small and midcap (SMID) segments, which have already rallied over the last 2-3 years. Sectorally, the firm expects strong growth for private banks, capital markets and exchanges, companies within the cement industry, defence sector companies, automobile and automotive ancillary companies, and healthcare companies.
The firm also highlighted optimism regarding IT companies on account of their export-oriented business benefiting from a strengthening dollar. It further said that despite being unnerving, volatility creates opportunities to compound wealth over the long run and urged investors to capitalise on the environment to build strong equity positions.
