Markets that moved sideways through 2025 may see a shift in 2026 as FIIs potentially return, supported by currency stability, cooling AI trade, and improving earnings visibility. While a 2024-style rally is unlikely, a balanced mix of momentum and value is expected, creating strong bottom-up opportunities across broader markets.

Stock markets: Which way will the wind blow in 2026?

Market Outlook 2026: A Balanced Mix of Momentum and Value

After a year of sideways trading in 2025, markets may see a shift in 2026 as Foreign Institutional Investors (FIIs) potentially return, supported by currency stability, cooling AI trade, and improving earnings visibility.

Key drivers for FIIs' return:
- Stable currency with an upward bias
- Cooling of global AI trade
- Prospect of sharp recovery in domestic earnings from FY27

In 2025, the massive FIIs sell-off was primarily driven by two factors:

Expensive Multiples & Slowing Earnings:
India's equity market was trading at a premium just as earnings growth began to falter, making it a fertile ground for profit booking.
The AI Trade Rotation:
FIIs actively shifted capital to other emerging markets, including China, Taiwan, and Korea, where the AI narrative was taking centre stage. India, lacking a strong AI story, was seen as a relative underperformer.

Looking ahead, several factors have started to align in favour of FIIs' return:

Stable currency:
The rupee's depreciation cycle appears to be peaking, and a stable currency with an upward bias could provide much-needed support to FII flows.
Cooling of global AI trade:
Initial signs of a correction in AI-heavy stocks in Nasdaq are already visible.
Prospect of sharp recovery in domestic earnings:
Earnings growth is expected to recover from FY27, driven by GST reforms and the prospect of next round of rate cuts.

In 2026, a balanced mix of momentum and value is expected, creating strong bottom-up opportunities across broader markets.

Momentum returns with FII re-entry:
With the combo effect of steady domestic flows and the FIIs return, momentum is likely to come back in 2026.
Value and stock-specific investing continue to do well:
Value-driven strategies will continue to play a significant role in the market.
Bottom-up opportunities in the broader markets:
Plenty of opportunities for alpha creation will be available in the broader markets.

While a 2024-style rally is unlikely, a balanced market with a mix of momentum and value is expected, creating exciting times ahead for investors.