In Q1FY26, the Indian stock market experienced a robust recovery, fuelled by a resurgence in domestic economic activity. GDP growth accelerated to 7.5% in Q4FY25, up from 5.6% and 6.4% in the preceding quarters, indicating a firming economic cycle. This momentum was largely attributed to the resumption of government spending, which had been paused during the election-heavy calendar year of 2024. The renewed fiscal activity led to a notable 10–12% year-on-year increase in corporate earnings for Q4FY25, prompting a marginal upgrade in future earnings expectations.
Globally, risk factors also moderated. A key development was the temporary suspension of reciprocal tariffs for 90 days, announced in April, which eased trade war tensions. Although the final outcome of the ongoing negotiations is anticipated by August 1st, markets are optimistic about a mutually advantageous resolution, though generally, tariffs are likely to be higher than in the pro-trade era. Meanwhile, reduced geopolitical tensions in the Middle East contributed to a decline in crude oil prices and supply uncertainties, positively impacting India’s fiscal health and corporate margins. These combined factors led to improved investor sentiment and a sharp drop in market volatility, with the India VIX Index falling from 21.43 on April 9 to 11.94 by July 9.
The Nifty50 delivered an 8.5% return in Q1, while mid and small-cap stocks outperformed with a 10.7% gain, rebounding from a 12% correction in H2FY25. However, sustaining this momentum may be challenging in the near term as investors await clarity on U.S. trade negotiations and Q1 earnings. The consensus suggests that aggressive tariff hikes are unlikely, as they could exacerbate inflation. The U.S. aims to use tariffs to generate revenue, protect local jobs, and improve market access, especially in countries like India with high import duties.
Q1 results preview
Domestically, the market anticipates a rebound in earnings growth to 10–12% in FY26, following a sub-5% growth in FY25. However, India’s earnings for Q1FY26 are projected to rise by 5–7%, supported by a favourable base effect, recent repo rate cuts, ample liquidity, moderating inflation, and a pickup in consumption. Mid and small caps are expected to lead this recovery, while large caps may see subdued growth.
Across sectors, IT remains under pressure due to global headwinds, though mid-tier firms show resilience. The passage of the U.S. finance bill and potential Fed rate cuts could support future IT demand. Banks have a positive long-term outlook due to lower funding costs and flexible monetary policy, though reduced lending rates and credit growth may impact near-term income. Infrastructure and consumption sectors are poised to benefit from increased government and household spending, while export-oriented sectors like IT, Pharma, and Metals may face short-term volatility. High-valuation sectors such as Capital Goods and Defence carry underperformance risks.
With the Nifty50 hovering between 25,000 and 25,500, concerns linger whether a muted start to projected Q1 earnings growth does not justify current valuations, which stand at a three-year high of 21.2x forward P/E. Market sustainability hinges on Q1 earnings upgrades and the resolution of global uncertainties, particularly trade negotiations and geopolitical tensions.
First published in Mint