In the context of the Indian stock market, 2025 would go down in the annals of history as a year of resilience. Despite geopolitical tensions, US tariffs, and heavy foreign capital outflows, the domestic market is set to end the year with decent gains, especially for the large-cap stocks. Benchmark Nifty 50 is up over 10% (till December 23) this year, even as broader markets have underperformed- the Nifty 500 index has gained 6%. The Nifty 100 index is also up by 6%, but the Nifty Smallcap 100 index has lost 6% this year so far, largely due to weak earnings and premium valuations.
Hopes are high that the coming year, 2026, will be better than 2025. Experts see several indicators suggesting that Indian stock market benchmarks may outperform next year, despite the risk of heightened volatility due to global factors.
Five factors pointing to a stronger Indian stock market in 2026
1. Anticipated earnings growth
Due to healthy growth-inflation dynamics and policy reforms, such as GST 2.0, earnings of Indian corporates are expected to improve from Q3FY26 onwards. The Q2 earnings were slightly above expectations, reinforcing the expectation that the worst in terms of earnings is behind us.
“We see the September quarter of FY26 as a key turning point in the corporate earnings cycle, noting that the listed universe delivered 12% year-on-year earnings growth in Q2FY26, while the broader market, excluding Nifty companies, posted a stronger 21% growth. This momentum will be reinforced by a robust second half of FY26,” said Pankaj Pandey, Head of Research for ICICI Securities.
Pandey expects the Nifty earnings per share (EPS) to grow at a CAGR of 15% over FY26-28E, led by telecom, BFSI and capital goods space. He pegs a two-year EPS CAGR for midcaps and small caps at 19-21%.
2. An India-US trade deal
US tariffs on Indian goods have been among the key factors behind the heavy selling by foreign institutional investors (FIIs) and the Indian rupee’s weakness against the dollar.
According to DD News, Commerce and Industry Minister Piyush Goyal on Monday said that both countries are in the advanced stages of negotiations for a bilateral trade agreement.
India has already finalised free trade agreements with three members of the Five Eyes (FVEY) intelligence alliance — Australia, the United Kingdom, and New Zealand. The other two members of the grouping are the United States and Canada,” DD News quoted Goyal as saying to journalists.
An India-US trade deal will be a major boost to market confidence and may attract foreign investors, looking for policy certainty and stable long-term trade.
3. The return of FIIs
FIIs have been selling Indian equities since July this year. In the cash segment, they have sold off Indian stocks worth nearly ₹1.72 lakh crore since July due to weak earnings, stretched valuations and US tariffs.
Experts expect FIIs to return to the Indian market with earnings improving and valuations coming to comfortable levels. An India-US trade deal will be a major trigger for the return of foreign investors.
“FIIs have been net sellers due to India’s underperformance versus peers, single-digit earnings growth, US tariffs, and heavy IPO (initial public offering) supply. Their ownership has declined to about 15.6%. We expect selling intensity to come down in CY26, with FIIs likely turning buyers in FY27 as earnings growth rebounds into double digits, valuation premium versus China and EM (emerging markets) normalises, and global capital potentially reallocates away from the US,” Nilesh Shah, MD of Kotak Mahindra AMC, told Mint.
4. Solid macro
The Indian economy is expected to grow above 7% in FY26 and near 7% in FY27 due to a revival in the capital expenditure cycle.
CareEdge Ratings projects India’s GDP growth at 7.5% in FY26 and 7% in FY27. In its report, CareEdge said that India’s capex cycle was showing initial signs of a recovery, as reflected in the sharp expansion in order books of capital goods companies and the increase in private-investment announcements.
India- the world’s fourth largest economy- is on course toward becoming the third largest world economy by 2030, with a projected GDP of $7.3 trillion.
Apart from healthy GDP growth, inflation is low due to lower crude oil prices and a healthy monsoon. The Reserve Bank of India (RBI) has projected GDP growth at 7.3% and CPI inflation at 2% for FY26.
5. Valuation comfort
The growth-valuation mismatch triggered a selloff in the Indian stock market after the June quarter earnings. At present, the valuations of large-caps appear in line with the long-term average, even as small-caps are still at a premium. Experts expect valuation comfort to attract foreign investors to the Indian financial market.
“We believe earnings growth is bottoming out and is likely to rebound in double digits in the coming year. Valuations have corrected from excessive premiums to long-term averages. This suggests the worst of the valuation excesses is behind us,” said Shah.
Read all market-related news here
Read more stories by Nishant Kumar
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.