A lot of money (i.e., liquidity) has flowed into the Indian stock market from the bank accounts of retail investors of late. Foreign investors may have sold but domestic investors have more than made up for it, keeping the upward pressure on stock prices intact. This was the market situation at the end of 2025.
The new year started with positive sentiment, with the Nifty scaling an all-time high. However the past week delivered a big blow. With the Nifty taking a tumble, investors are beginning to wonder if the much-anticipated correction is finally here.
So, could the stock market crash in 2026? While we won’t make any predictions in this article, we will do our best to answer that question.
But first:
Why has the stock market fallen?
The first reason is the US tariff issue with regards to India. US President Donald Trump has backed a bipartisan bill that could escalate India’s tariff troubles. This legislation enables tariffs of up to 500% on nations importing Russian oil.
If these tariffs are imposed, many listed companies are likely to be hit. In fact, the day reports of these tariffs surfaced, several prominent exporters to the US saw their stock prices fall.
India and the US have been working on a trade deal for many months but some issues have become roadblocks. The import of Russian oil has been a key point of contention.
The other reason the market is falling is the concern surrounding earnings growth. The market expects the ongoing earnings season to signal a clear recovery in sales and profit growth. If there is a disappointment on either sales growth or margins, Dalal Street is likely to react negatively.
Some investors would rather wait for the results to come in amid the ongoing uncertainty instead of buying in anticipation of good results. This makes it easier for stock prices to fall.
Will there be a market crash in 2026?
We believe there are a few valid reasons to expect a serious market correction in 2026.
One of these is a potential flare up in a geopolitical hotspot that turns into an actual war. The stock market is not anticipating something like this. Markets were surprised at the US action in Venezuela. Now there are genuine concerns about US action in Iran.
Another reason is a potential recession in the US. Once again, financial markets are not expecting this. The markets believe the US economy will avoid a recession this year. But stranger things have happened in financial markets. If consumer spending in the US slows down sufficiently, the possibility of a recession cannot be ruled out. This is something investors must watch out for.
There are potential causes of a correction, such as a spike in oil prices or the US Fed changing its decision to cut interest rates.
There is also the possibility that trade deals many countries have signed with the US will break down. If 2026 were to see a return of trade wars, a significant stock market correction could take place.
What about valuations?
The correct way to think about market crashes is to consider the price-to-earnings ratio of the benchmark index (Nifty).
Historically, whenever the Nifty PE ratio has gone above 25, it has been a warning sign of a stock market bubble, a serious correction, or even a bear market… at least in hindsight.
This doesn’t mean you should be complacent if the Nifty PE is 23 or 24. We believe a Nifty PE ratio above 20 indicates that the market is expensive. There could be specific stocks that are cheap or reasonably priced. However, whenever the Nifty PE gets close to 25, you should be wary.
The Nifty PE has been between 20 and 25 for a long time now. Right now, it’s at 22.4, right in the middle of the 20-25 range. This makes the stock market vulnerable to a correction.
Sentiment has also turned negative. Thus, we can say that the chances of a market crash in 2026 are high. Of course, the situation can change if sentiment turns positive again.
However, this should not be taken as a prediction.
Conclusion
Equitymaster has been in the market for over 30 years and there is one thing we know for certain:
No one can predict the future, and no one should attempt to. We strongly believe that time in the market is far more important than timing the market.
In the long term, the stock market will go up with the economy. We have even said that the Sensex will rise to 100,000 by 2027. But this is based on earnings growth, not sentiment.
Instead of trying to anticipate or react to every small move in the market, it would be better to make a watch list of high-quality stocks and buy them when valuations become reasonable.
Do your due diligence. Consider factors such as valuation, industry trends, corporate governance, and market risks before making any investment decisions.
In this uncertain environment, if you are concerned about the stocks in your portfolio, ask yourself the following questions:
- Are the company’s fundamentals weak?
- Has there been any recent negative changes in the company’s fundamentals?
- Did the PE ratio shoot up without an improvement in the company’s earnings?
- Did you make a mistake in your original analysis?
These are all good reasons to sell or at least reduce some of your holdings.
If the answer to all the questions above is a clear ‘no’, you can consider holding on, especially if the valuations are not too expensive.
And if the fundamentally strong stocks on your watch become available at reasonable prices, you can consider buying them.
The best stocks to invest in right now are those that have suffered a correction because of changes in sentiment, not fundamentals.
Happy investing!
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com