They explain how the normalization of earnings growth, rising market concentration and high valuations are likely to result in subdued returns, tighter stock-level diversification and a renewed preference for large-cap quality as investors recalibrate expectations for the next phase of the market cycle. Edited excerpts –Q) Well, we hit new all-time highs in November with a gain of about 10% so far this year. How are we positioned for 2026?
A) After a strong run to record highs, 2026 is likely to be a year of continued moderation, not acceleration. Our work shows that sustained earnings growth is rare, and EPS estimates for FY26-27 have already been significantly reduced.
Historically, rising market concentration precedes slower GDP and earnings per share growth, indicating weak breadth and lower average stock returns.
The GRIP framework also signals caution as growth normalizes, risk premia turn and the masses are positioned toward quality. Expect moderate returns with a sharp diversification across stock cohorts, with large caps expected to outperform mid-caps!
Q) Gold and silver outperform by a wide margin in 2025. How will precious metals develop in 2026? Are there triggers to look out for?
A) A meaningful near-term trigger is the recent regulatory change that allows NPS funds to invest in gold and silver ETFs, which could structurally increase domestic institutional allocations to precious metals in 2026.
This is coupled with the continued accumulation of gold by global central banks, which remains a supportive demand driver over the medium term.
However, history suggests that precious metals can go through extended phases of limited or moderate returns, and the visibility of returns is still lower than that of financial assets.
Against a backdrop of heightened market volatility, geopolitical uncertainty and rich stock valuations, gold – and to a lesser extent silver – may continue to serve as a portfolio hedge and potential safe haven for institutional investors.
Q) The rupee made a new low against the USD and crossed the 90 mark. Are we on track to cross the 100 mark against the USD? What causes the fall?
A) The decline in the rupee can be attributed to the delayed US-India trade deal, gold imports and weak exports leading to widening trade deficits, subdued capital inflows caused by foreign investment outflows and reduced central bank intervention in the foreign exchange market.
Given that India is an energy-dependent country that always runs a trade deficit, the rupee will always have the depreciation trend (3.1% median depreciation over the last two decades), but it is unlikely to reach the 100 mark anytime soon.
The rupee will undergo further depreciation of 1% to 1.2% in line with historical trends and may reach a level of Rs91.2/USD by the end of March 26.
Q) Which sectors are likely to be in the spotlight in 2026? Sectors likely to lead the rally.
A) Leadership in 2026 will likely be limited and quality-oriented. As earnings growth normalizes and market concentration increases, FMCG, healthcare and IT are best placed to lead.
These sectors offer reasonable earnings visibility and a strong balance sheet, and have historically outperformed during periods of slowing growth and increasing concentration.
Underperformance of Nifty IT versus Nifty has reached historic lows, with empirical evidence pointing to IT performing relatively better over the next twelve months.
Also, the global CEO Confidence Index fell to one of its lowest levels ever on June 25 and has been a strong contrarian indicator, with the IT index delivering outsized returns (49%/36% average/median) 12 months after the index trough.
DMF flows are already trending toward these quality areas, reinforcing relative performance. Utilities could also do well in terms of their defensive posture and stable cash flows.
Q) Are there themes or sectors that have already emerged in 2025 and will investors be better off by allocating their stakes in those themes?
A) Yes, investors should consider combining their exposure to themes that had issues with revaluation relative to earnings in 2025.
This also applies to the cyclical SMID sectors (capital goods, metals, auto parts) and also defense, where prices have developed well ahead of earnings persistence.
With FY26-27 downgrades accelerating and market concentration increasing, these sectors are vulnerable to a rating downgrade. Making gains and moving into high-quality, large-cap sectors is a sensible risk management move for 2026.
We do not see any short-term triggers in these sectors that could sustain high valuations.
Q) Motherboard initial public offerings (IPOs) have crossed the 100 mark mark for the first time since 2007 (including SMEs), raising nearly Rs 2 lakh cr. What are your expectations for 2026?
A) The IPO frenzy shows no signs of stopping in 2026 as nearly 53 companies currently in the pipeline have filed their DRHPs.
Institutional investor interest in new equity issues has increased significantly over the past two years, partly due to exorbitant valuations in large segments of the secondary market.
However, stocks listed over the past two years have not been immune to the recent market correction. A majority of the IPOs listed in CY24 and CY25 have witnessed significant declines, with around 66% and 62% of the stocks respectively delivering negative returns compared to their listing prices.
Importantly, the quality of companies coming to market has deteriorated significantly compared to previous cycles. The average cumulative pre-tax CFO-to-EBITDA conversion over a three-year period has fallen sharply, from 102% for CY13 listings to just 59% for CY25 listings.
In this environment, stocks with superior cash conversions have relatively outperformed stocks that perform poorly on this measure, a trend that is expected to continue through 2026.
Q) What were the most important lessons from the year 2025 that you would like to share with the readers?
A) A long-term market rally cannot be sustained without earnings support. While this may sound obvious, such fundamental principles are often overshadowed in narrative markets.
Market corrections often precede a slowdown in economic and profit growth – a pattern that continued in 2025.
We had alerted our customers to the market surplus well before the peak on September 24.
The early phase of the broad post-pandemic rally was supported by record high earnings contributions from the SMID universe, driving market concentration to historic lows.
However, in the run-up to the peak, multiple expansion became the primary driver of returns – a dynamic that has rarely proven sustainable for more than a few quarters.
In the current environment, prioritizing exposure to segments with greater certainty and visibility of earnings growth is more important than chasing absolute size.
Our broader view on equities remains cautious through 2026, but select parts of the market continue to offer an attractive convergence of reasonable valuations and predictable growth.
Q) What will be the big triggers for the stock markets in 2026?
A) We believe CY26 will continue to be a year of normalization in earnings growth, with market returns extremely polarized.
Our GRIP framework continues to point to a cautious stance on equities and asset allocation in favor of bonds.
The US-India trade deal could provide a near-term rebound if it materializes, but our return expectations for the year remain muted.
Large parts of the market continue to trade at unsustainable valuations, especially with a broad slowdown in earnings growth.
Agencies(Disclaimer: Recommendations, suggestions, views and expert opinions are their own. These do not represent the views of the Economic Times)
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