Market rally coming? Profit recovery, PSU banks and NBFCs in focus, says Aditya Sood of InCred

India’s subdued market phase may be coming to an end, with the next one to three years likely to be driven by a strong earnings rebound, said Aditya Sood, portfolio manager at InCred Asset Management. Over the past 15 to 16 months, we have seen flat market returns and corrections in small and midcaps, but Sood believes the consolidation phase is over, paving the way for a healthier upcycle.

Profit growth recovers to 10-12%

According to Sood, the Nifty’s earnings trajectory has bottomed out. Earnings are expected to rise by 10 to 12%, while midcaps are likely to outperform with growth of 12 to 14%.Sood notes that the sharp decline in earnings – from 25% in 2021-2024 to just 4% more recently – has now stabilized and is poised for a mean reversal.

Top sectors that perform better

Sood highlights several sectors that are well placed for the next stage of the cycle:

1. NBFCs, especially mortgage backed lenders and gold loan financiers like Muthoot and Manappuram.
2. Banks, especially PSU names and large private lenders like SBI and Axis Bank, where he expects valuation catch-up and multiple expansion.
3. Pharmaceutical companies (CDMOs) expect profit growth of 25 to 30%.
4. Hospitals selectively preferred further revaluation of their rooms.
5. MFI credit costs are expected to normalize after a challenging year.
6. Manufacturing, a broad sector benefiting from structural reforms and capital investments.

Is the global AI rally a bubble?

Sood warns that US tech sector valuations are on the high side, with Nasdaq’s market capitalization to GDP reaching 250%, and even higher if crypto wealth is included. “Investors around the world are obsessed with a handful of US tech giants. Once money starts rotating out of the US, India will be one of the biggest beneficiaries given its attractive earnings setup and cheaper valuations versus global emerging market countries,” he said.

A peace deal and a trade deal could boost markets

Short-term triggers include:

• A potential peace deal between Russia and Ukraine that could ease supply chain bottlenecks
• The long-awaited US-India trade deal
• Signs of a cyclical upswing in metals worldwide

Sood sees significant value in PSU banks and metal stocks, which will benefit significantly from geopolitical cooling and normalization of demand.

With earnings poised to rebound, India’s relative valuation advantage improving and major catalysts on the horizon, Sood believes markets are positioned for a steady, earnings-supported upward cycle. For investors, the playbook is clear: focus on financial services, pharmaceutical CDMOs, selective healthcare, metals and manufacturing executives.