Market sentiment is shifting from extreme negativity to hope
Analyzing the market behavior after major events including EU developments, India-US trade deal, Union Budget and RBI policies, Tandon noted that the extreme negativity is subsiding and a ray of hope is returning for the investors. The market has entered a consolidation phase where the worst appears to be over, although the best is yet to begin.
Trading activity is increasing as impact costs normalize, and investors are returning to the markets with renewed confidence. Tandon emphasized that buying and selling are ultimately driven by behavioral perspectives; When investors are in a relaxed, positive mood, they tend to participate on the long side. He sees the current environment as an opportunity to rebalance the portfolio.
Smallcaps and midcaps: correction due to lack of buying pressure, not selling pressure
The CIO provided crucial context for understanding the carnage in the mid- and small-cap space, noting that corrections occurred on low volumes rather than extraordinary selling pressure. Stock prices fell not due to active selling, but due to the complete disappearance of buying interest, causing participation to plummet and impact costs to soar.
This dynamic is now reversing, with investors beginning to look at beaten names and recognize value opportunities. While Tandon doesn’t expect an immediate spark or dramatic upside, he sees a constructive backdrop emerging for both smallcaps and midcaps, especially smallcaps. The key lies in identifying stocks that have the potential to rise significantly from current levels.
The damage to sentiment was greater than the profit impact for mid and small caps
On the earnings trend, Tandon clarified that the earnings disappointment in the mid- and small-cap universe was not particularly meaningful. The real damage came from sentiment rather than fundamentals. The psychological impact far outweighed the actual loss of profit, and this sentiment-driven trend is now reversing.
Investors should look for opportunities to participate, rather than holding onto the negative thought that nothing will improve. The phase of extreme pessimism has changed and market participants should take advantage of the opportunities now visible.
Pharma remains a long-term bull case with a generic focus
Tandon maintained his constructive stance towards the pharmaceutical sector, especially generics, despite the sector not meeting expectations in recent times. Uncertainty surrounding trade relations has reduced following the India-US trade deal, which completely exempted pharmaceuticals and generics from tariff considerations.In addition to the exemption itself, the many trade agreements being signed provide psychological relief for foreign companies doing business with Indian pharmaceutical companies. This treaty background creates comfort not only for US markets, but for other countries as well. With earnings disappointments limited to a few names and broader metrics remaining reasonable, Tandon remains a long-term pharma bull.
FII selling from depletion signals a reversal of the cycle
On the crucial issue of foreign institutional investor flows, Tandon’s predictive analyzes indicate that FPIs are depleting sales with high confidence. The extraordinary sales of the past six quarters have reached their peak, removing the intense pressure of recent periods.Rather than getting excited about one or two days of positive data, Tandon emphasized the importance of recognizing the broader cycle reversal. This shift is crucial for a sustainable market recovery and signals that the worst of the foreign selling pressure could be behind the Indian markets.
The rupee depreciation cycle peaked around 92 points
Currency fluctuations significantly impact FPI returns as depreciation directly reduces their overall calculations. Quant Mutual Fund’s macro analysis suggests that the USD/INR pair has peaked around 92, which means the depreciation cycle has completed or is in its final stages.
The rupee can appreciate now, but more importantly, it needs to stabilize first. RBI measures will help achieve this stability, which will act as a catalyst for FII flows. Tandon clarified that FIIs do not necessarily need a stronger rupee; they need a stable rupee. Combined with an improving macro picture and reduced uncertainty about US trade, the headwinds that have plagued recent periods are disappearing.
India’s risk appetite adjustment drives outperformance in 2026
According to Tandon’s analysis, Indi’s risk appetite has corrected substantially and is now approaching the lower end of the range. This positioning increases the likelihood of markets moving higher from current levels given the constructive setup and improved liquidity dynamics.
Money moves between markets on a relative basis. While regional equities and US markets remain strong at the moment, Tandon expressed caution on global equities in general, although he distinguishes between global and regional dynamics. When these strong markets correct meaningfully, India, which has been a laggard and underperformer, will benefit.
During global corrections, capital flows from high-risk areas to low-risk areas. With India’s risk appetite on the low side, the country is in a position to attract capital flows when global markets are under pressure. Despite significant underperformance that may make current optimism seem counterintuitive, Tandon believes the backdrop and construct are perfect for India to be a relative outlier, with expected outperformance in 2026.
IT companies can develop into AI enablers and adapters
Tandon wanted to address concerns that Indian IT companies are at the receiving end of anti-AI trade sentiment and acknowledged that India has missed the opportunity of an AI tool and product.
development perspective during the first wave. However, he sees potential for transformation in the sector.
Implementing AI solutions requires services for which today’s IT companies are well positioned. Some Indian IT companies have the potential to become AI enablers as these tools and processes require customization and adaptation. Existing IT companies will fulfill this crucial enabling function and shift from pure IT services to AI implementation specialists.
While Tandon is not advocating an immediate purchase, he says he will look for opportunities at appropriate times. He isn’t too negative about current levels and expects the narrative to evolve towards these companies being recognized as AI enablers and adapters, rather than just traditional IT service providers.
The IT sector is waiting for a turning point, not specific price targets
When asked if IT offers a timing or valuation option, Tandon explained that his company does not operate by setting specific levels. Instead, they believe in inflection points; extreme turning points that are difficult to estimate exactly 8% or 10% lower.
These inflection points have not yet been reached, indicating that more correction may be needed, both in terms of price and time. However, investors cannot afford to short these names or maintain an extremely bearish mindset as this will cause them to miss the opportunity when it presents itself. This approach requires overcoming the negativity and a willingness to meaningfully add IT stocks to portfolios at the right inflection point.
The investment cycle reached a peak, the Consumption theme was preferred
Contrary to expectations for a recovery in the investment cycle, Tandon believes that the investment cycle has peaked from a medium-term perspective. It may be premature to call for a new revival as the current government’s focus has shifted to consumption; an area that had been neglected.
The GST reform and income tax reform are moving in directions aimed at boosting consumption. Instead of being overly optimistic about the investment cycle, Tandon prefers to play consumption themes in the current tough environment. This does not imply negativity about the infrastructure; he remains constructive on big infrastructure names that have also corrected and offer meaningful opportunities. The preference hierarchy simply favors consumption over capital investment when choosing between issues.
Consumption plays: FMCG, food processing and stock-specific approach
Consumption represents a broad theme that requires a stock-specific analysis rather than a general sector allocation. Tandon highlighted select FMCG names and food processing companies as particularly interesting, with the latter being major beneficiaries of GST changes.
Within consumption, the automotive sector has already had a round of strong performance. Given the breadth of the consumption universe, investors need to identify specific opportunities rather than buying up the entire area indiscriminately. Consumption valuations are not universally cheap or at clearly attractive levels, which requires a relatively basic approach focused on relatively underperforming sectors combined with visible growth opportunities.
Key insights for investors
Tandon’s comprehensive market outlook provides several actionable insights for investors navigating 2026:
Market sentiment has shifted from extreme negativity to cautious optimism, creating a constructive environment for stock-specific opportunities. The worst corrections in small caps and mid caps came from a lack of buying rather than active selling, and this dynamic is reversing. The exhaustion of FII selling and the stabilization of the rupee around $92 against the dollar removes the major headwinds that have been weighing down the markets in the past few quarters.
From a sector perspective, pharmaceuticals and generics remain bullish in the long term with favorable trading dynamics. IT companies are waiting for a turning point, but offer future potential as AI enablers. Given the focus on government policy, consumption themes are favored over capital investments, although big names in infrastructure remain constructive. Most importantly, India’s relative underperformance and low risk appetite position the market for outperformance in 2026, when global markets are under pressure.
The overarching message: Extreme negativity is over, creating selective opportunities for investors who can identify inflection points and maintain the right conviction without succumbing to excessive pessimism or premature enthusiasm.
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