The large supply of IPOs may limit market growth in 2026; returns likely to remain subdued: Ashish Gupta, Axis MF

Indian equity markets may struggle to deliver outsized returns in 2026 as a surge in equity supply from IPOs and promoter sales continues to weigh on valuations, according to Ashish Gupta, Chief Investment Officer at Axis Mutual Fund.Speaking to ET Now, Gupta said that while domestic equity inflows remain structurally strong, rising supply has created a tight supply-demand balance that is preventing a runaway rally, especially in mid- and small-cap stocks.

Strong domestic flows, but supply has increased faster

Over the past five to seven years, Indian equity markets have been buoyed by steady domestic inflows, mainly through mutual funds and SIPs. These flows have remained resilient despite the volatility of the past six months.However, Gupta cautioned investors against assuming that strong inflows alone guarantee higher market returns.

“Markets are driven by both supply and demand. While domestic demand has been strong, supply has also increased sharply over the past two years,” he said.

According to Gupta, India saw nearly 100 IPOs last year and 91 IPOs in 2024, raising around ₹1.7-1.8 lakh crore. Moreover, promoters and private equity investors sold nearly ₹3 lakh crore worth of shares, taking the total share offering to nearly ₹5 lakh crore.

This exceeded net domestic inflows of just over ₹3 lakh crore, putting pressure on broader market performance – especially as foreign institutional investors (FIIs) turned net sellers.

Why the major indices masked broader market weakness

While the Nifty ended last year with a gain of around 10%, Gupta pointed out that the major indices were not reflecting the underlying market stress.

“The average stock return was actually negative 4%. Small-cap indices fell almost 6% as most of the supply came from mid- and small-cap stocks,” he said.

Large-cap stocks, especially index heavyweights, remained relatively insulated from supply pressures, but the broader market breadth deteriorated significantly.

The IPO pipeline remains tough in 2026

It is unlikely that the surplus supply will decrease in the short term. Gupta noted that over ₹1 lakh crore worth of IPOs have already been filed with the market regulator, with bankers indicating that a similar pipeline is waiting to be launched.

Several major IPOs are also expected to hit the market in 2026, further tightening the supply-demand equation.

“This will keep valuations in check and make a year of very strong market returns unlikely,” he said.

Valuations of mid and small caps are the most vulnerable

Gupta explained that higher valuations have encouraged private equity exits as well as new listings. As mid- and small-cap stocks significantly outperformed in 2023 and 2024, their valuation ratios rose to a premium over large-caps.

“When new companies enter the market, they usually trade at a discount to prevailing multiples. Investors are switching to these cheaper alternatives, putting pressure on existing stocks,” he said.

While this has led to valuation compression, Gupta added that the correction is not necessarily unhealthy.

“Had it not been for this offering, mid- and small-cap valuations could have become extremely frothy,” he said.

Sectors to watch in 2026

Despite subdued overall market expectations, Gupta remains constructive in certain sectors where earnings growth visibility is improving.

Financial services remains a key theme, supported by a sharp recovery in credit growth. Systemwide credit growth rose to around 14.5% in December from 8 to 9% earlier this year, helped by easing monetary policy and regulations.

Banks and NBFCs are both beneficiaries, with credit costs for NBFCs – especially those exposed to microfinance and unsecured lending – starting to decline after last year’s stress.

Automobiles are another sector showing cyclical improvement. Gupta said the sector is benefiting from both consumption recovery and financial easing.

“Demand for passenger cars and two-wheelers has increased since September-October. Even the commercial vehicle cycle is becoming favorable now,” he noted.

On the consumption front, rural demand is showing signs of recovery in the second half, while urban demand has improved following VAT cuts. However, Gupta warned that the recovery is uneven.

“There are places where there is an improvement in discretionary consumption, but retail consumption remains softer than expected,” he said.

Tip for investors: temper return expectations

Gupta advised investors to recalibrate expectations in a market environment dominated by high supply and selective earnings growth.

“This is not a year for broad rallies. Stock selection, sector focus and realistic return assumptions will be much more important,” he said.

As the supply of IPOs continues to increase and valuations adjust, markets may remain within their range even if underlying economic growth remains intact – making discipline and selectivity critical for investors in 2026.