Bearish view of bullish outlook

A few weeks ago, Morgan Stanley gave a huge thumbs up to Indian equities. It argued that the phase of correction had ended, and the Indian stock markets would enter a new era in 2026. Macro trends, rather than specific stocks or sectors, will play a larger role as India’s economic growth cycle gains momentum, felt Ridham Desai, MD, and chief India equity strategist, Morgan Stanley, and his colleague, Nayant Parekh. The factors that caused the indices to lag those among the emerging market peers were gone, and the scenario was favourable in favour of a renewed bull period.

In the optimistic scenario, which the two authors assigned a 30 per cent likelihood, the Sensex would climb to more than 107,000 by December 2026, up more than a quarter from the existing level of 85,000. In the central forecast, which carried a 50 per cent probability, the index would be at 95,000, or more than 10 per cent higher. The bearish prediction, or the downside scenario, with a 20 per cent probability, projected the index at 76,000, or more than 10 per cent lower. Most experts, however, veered towards 95,000, as the narrative changes from caution in 2025 to cautiously-positive in 2026, and from consolidation to minor celebration.

Although the markets began 2025 with early gains, they slipped into a sideways pattern near the previous highs. Investors grappled with trade and tariff-related developments, geopolitical tensions, and shifting global interest-rate expectations. The only positive was that despite the persistent net outflows by the foreign portfolio investors (FPIs), domestic inflows through mutual funds emerged as a crucial stabilising force for the indices. According to Nitin Rao, CEO, InCred Wealth, it was a year that “saw more of a paused market attempting to make sense of developments, rather than rallies.”

This period of consolidation helped to cool existing and elevated valuations, curb speculative excesses, and investor focus towards corporate earnings visibility, and balance-sheet strength. While the large-cap stocks provided stability, midcaps, and the small-cap segments witnessed meaningful corrections. According to Motilal Oswal, although the Nifty touched a record of over 26,000 in December 2025, its one-year forward P/E (price-earning) of 21.5x stood four per cent above the long-period average of 20.8x. This suggests that large-cap valuations are relatively reasonable. Hence, the valuation-driven story may be over now.

In contrast, the Nifty Midcap100, and Smallcap100 trade at P/E multiples of 29x, and 25x, which represent premiums of more than 26 per cent, and 50 per cent over their respective long-term averages. This implies that over the next 12 months, investors need to adopt a selective approach towards such stocks, and take calls based on actual and projected performances, rather than resort to sector-driven strategies, or cap-driven ones. In these segments, stock movements will not be uniform, but highly uneven, with a few prominent gainers, and most of them either flat or down. The rise of the indices in 2026 may not be secular and democratic.

What will prove to be critical will be the corporate profit forecasts which, after undergoing downward revisions, have begun to stabilise. This signals that the worst of the earnings pressure may be over. According to Motilal Oswal, Indian equity markets are trading close to all-time highs, with the Nifty ending 2025 with gains of nearly 10 per cent. “We believe the Government’s ongoing policy initiatives will help reset the trajectory of corporate earnings over the medium term. We expect Nifty earnings growth to bounce to nine per cent in FY26E (from one per cent in FY25), and further improve to more than 15 per cent in FY27E and FY28E,” estimates the report.

Hence, the outlook, and reality in 2026 may mark a transition from valuation-driven returns to earnings-led growth. According to Rao, equities will show “directional improvement” rather than a dramatic breakout, with large-caps remaining the core investment universe due to the stronger fundamentals and better earnings visibility. Key domestic triggers will include the Union Budget, government spending, RBI policy actions, and FPI flows. Global factors such as the US interest rates, geopolitics, and a potential India-US trade deal will emerge as important swing variables for the indices.

“With easing geopolitical tensions, and the prospect of an India-US trade deal, sentiments could strengthen further,” states the market outlook report by Axis Mutual Fund AMC. As 2026 unfolds, Indian equities are poised to reflect “energy, resilience, and forward momentum.” For investors, the next year may ultimately reward patience over drama where disciplined asset allocation, earnings visibility, and balance will matter more than chasing momentum. As stated earlier, there may be o sustained rallies, no inflexion points when the indices may just take off to new highs. What may happen may be steady, slow, and uneven rises, which are stock specific.

Nilesh Shah, MD, Kotak Mahindra AMC, told the media that 2026, like 2025, may be a year of “moderate return” for equities, as well as fixed income instruments, and precious metals. They will deliver positive returns, but investors need not go overboard over them. A media report summarised that the message for the investors was clear. They needed to “stay diversified, temper expectations, and focus on long-term fundamentals, rather than chasing short-term gains.” But this is unlikely to happen. If gold loses its sheen, money will find its way into equities, and fixed income.

Some experts contend that 2026 may not see linear and straightforward trends. In the first half of the calendar year, for instance, the India stock indices may be muted due to external factors like the policy uncertainty in the US. In the second half, when Indian corporate earnings firm up, the country’s GDP growth story remains intact, and moves closer to 10 per cent, and “growth premiums become too attractive for foreign capital to ignore,” there will be more buoyancy in stock prices. Thus, the real upward movement of the indices will begin in the second half.

Of course, there is a bearish outlook too. Recently, an expert stated that Indian equities were “in a bubble of epic proportions.” He added that it was “not a healthy bull run.” Since the market is overpriced, which is reflected in high valuations, promoters are taking advantage, and offloading their stakes. This possibly helps us to understand the ongoing IPO (Initial Public Offering) boom, as promoters and early-investors use the route to cash out at high premiums, and returns. According to this expert, the Nifty is wonky. Its PE is contributed by select state-runs firms. If these were excluded, the Nifty PE will almost double.