"The corporate earnings are likely to be good in Q3. With the results season getting under way, we believe fundamentals... will govern equity movements in the medium term," BNP Paribas Asia Pacific Strategist Manishi Raychaudhuri said in a report.
The earnings environment has improved, but some sectors remain a drag, said the report titled 'Indian Earnings: Q3 Likely to be Good'.
Indian stock market's recent sound performance was driven not just by improvement in macro data points and positive sentiment around politics but also by earnings surprise in October-November, Raychaudhuri said.
The performance will be driven predominantly by IT, autos, telecoms and metals, with financials, capital goods and oil & gas likely to weigh on overall earnings, the report said.
"Notwithstanding the recent improvement in earnings environment, we think growth estimates for some sectors like banks, autos, consumer staples and telecoms for FY15 are overstated."
Since mid-September 2013, India has outperformed its Asian peers. Improvement in macroeconomic data points and expectations of a new government contributed to the outperformance, but an improved earnings environment possibly provided stronger support, the foreign firm said.
It said some sectors are expected to outperform the market in Q3. Among the large sectors, autos, technology and telecoms are likely to report strong earnings growth.
Not surprisingly, many of the earnings outperformers are beneficiaries of currency depreciation, such as autos, metals and IT services. Metals and telecoms stocks have a low base advantage.
Earnings are, however, likely to be dragged down by banks, capital goods and oil & gas among the major sectors. In each of these sectors, margin compression is likely to be the key reason for underperformance, the report said.