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Unmesh Sharma, Head of Institutional Equities at HDFC Securities, offers a measured outlook on the Indian stock market for FY26, predicting a range-bound market with flat to single-digit returns for the Nifty index. In a recent interview with Mint, Sharma discussed market valuations, the impact of recent government reforms, and the anticipated effects of a potential US Fed rate cut.
Sharma believes the market's current position is range-bound, citing strong twin balance sheets and double-digit corporate earnings growth as reasons for a lack of significant downside risk. However, he points out that the Nifty is trading at a premium, approximately 1 standard deviation above its mean valuation (around 22.5 times FY26E, compared to a 10-year average of 20.4 times). This premium, coupled with ongoing geopolitical uncertainty and tariff concerns, limits potential upward re-rating.
With limited valuation upside, Sharma anticipates Nifty returns to be primarily driven by earnings growth. Based on an estimated 9% earnings growth in FY26, he predicts flat to single-digit returns for the Nifty index during this financial year.
Sharma views recent government initiatives, such as GST reforms and tax rebates, as positive steps to boost consumption. These measures are expected to particularly benefit sectors like automobiles, consumer durables, and retail. Further, RBI's monetary policy changes, including CRR and repo rate cuts, are anticipated to reduce corporate borrowing costs, stimulate capital expenditure (CAPEX) projects, and ease the interest burden on existing loans.
Sharma acknowledges India's recent shift from a geopolitically favorable position to a more challenging one. He suggests that resolving these geopolitical issues is crucial for reducing market volatility and improving earnings visibility, thereby attracting FPI investment. He also notes that valuation corrections, coupled with healthy corporate earnings growth, could make India a more attractive investment compared to other emerging markets.
Sharma reports that aggregate earnings within HDFC Securities' coverage universe grew by 10% year-on-year (YoY) in Q1FY26, an improvement from 8% in Q4FY25. He expects this growth to continue, particularly as earnings in key sectors like BFSI, IT, and consumption appear to have bottomed out. Factors contributing to this anticipated revival include GST cuts, benign inflation, declining interest rates, and fiscal support.
Sharma highlights the Nifty's current valuation, one standard deviation above historical means, as a key risk. Any significant earnings shortfall in FY26 could negatively impact the market. Further risks include potential delays in banks' NIM recovery due to additional repo rate cuts and unmet market expectations regarding:
Disappointment on any of these fronts could adversely affect the market.
Sharma anticipates a high probability of a US Fed rate cut in September, a development generally positive for emerging markets. However, he cautions that the impact on the Indian stock market might not be straightforward. He expects that market sentiment in September will be heavily influenced by geopolitical factors, corporate earnings, post-monsoon consumption trends, the festive season, GST rationalisation, and continued government spending.
