“It was the best of times, it was the worst of times…” said Charles Dickens in the opening lines of his famous novel, ‘A Tale of Two Cities’. Interestingly enough, when we think of markets in 2025, this line perhaps best describes the year. The indices hit new highs, GDP shot up but the punitive US tariffs, muted earnings cast a pall of uncertainty. Heading into a new year, the worst seems to be behind us. As Morgan Stanley stated, “Following their worst underperformance in three decades, we see Indian equities regaining their mojo in 2026.”
The Goldilocks condition of high GDP and low inflation is set to sustain and provide more legs to the earnings growth trajectory as well. India underperformed its emerging market peers by almost 27% in 2025. As a result, the valuation premium over EMs has now come down to 64% now from 90% a year ago, almost in line with historical averages. This, coupled with the other macro and market dynamics support the case for a stronger 2026.
Nifty seen above 29,000 by next December
One of the most prominent levels to watch as we set to welcome the new year is how high the benchmark indices scale up to. Most brokerages expect the Nifty around the 29,000 mark by next December, approximately 10-13% upside from current levels. Jefferies has one of the most conservative Nifty targets of “28,300 implies 10% upside.” Other brokerages like Goldman Sachs, Bank of America, Kotak see the Nifty scaling above the 29,000 mark.
According to most, policy easing and improving earnings will help mark a shift in sentiment in 2026.
The big earnings uptick
One cardinal factor that’s driving the optimism is undeniably the expectation of strong earnings growth in 2026. While 2025 was about earnings seeing high single-digit growth, the real upgrade story is expected to be unveiled in 2026. The Nifty earnings are expected to see an average 15% growth in 2026.
From higher growth in banks to autos and power benefitting from low base and GST cuts, the growth is expected to be significantly broad based. Cement & telecom too offer strong EPS growth prospects. According to Jefferies, “higher inflation next year should also act as a tailwind for broader corporate revenue and EPS growth.”
Small and midcaps set to surprise?
The other big outlier in 2026 growth prediction is definitively the small and midcap end of the market. The BSE Midcap and Smallcap indices underperformed the large peers so far in 2025. However, the PE ratio of the small and midcaps are now near their 5-year average. Making a case for the small and midcap stocks, Emkay outlined that, “SMID valuations are optically high, albeit justified by sector composition differences. Nifty constituents have higher 20 weights in low P/E sectors ( Energy) Vs Small and Midcap 250,” indices.
According to brokerages this high valuation in the smal and midcap space is supported by “growth and improved earnings quality.”
The big bets for 2026- Key sectors to watch
The question then is what are the key sectors to bet on? From global to local, one unanimous choice amongst most brokerage list is the consumption theme. But there are some more too.
#Consumption: The government has put into place a multi-pronged approach to boost consumption, primarily by increasing disposable incomes, reducing tax burdens, and supporting job creation. The higher disposable income for a large section of the salaried middle class is expected to be spent on consumption of goods and services. GST rationalisation, rate cuts, benign inflation, and a good monsoon is expected to support the consumption theme.
#Domestic cyclicals: Overall the expected demand revival is likely to aid the domestic cyclicals in totality. Hospitality, travel, real estate, cement and auto are among the top investment themes.
#Consumer discretionary: Consumer discretionary is another big bet based on the GST rate rationalisation. Most market observers believe that a revival in the urban demand is set to boost the overall consumption theme, and this sector is seen as a direct beneficiary of the GST rate cut.
#Financials: Another common theme that is expected to be in focus is the banking and the financial sector. The sector is expected to register double-digit growth in net profits. According to Morgan Stanley, “rising credit growth and low credit costs are offset by likely NIM compression. Deregulation appears positive for the banks.”
#Industrials: The other key focus area is the industrials segment. Along with the govt capex, there is an expectation of a potential pickup in private capex. The market is also hopeful of an India-US trade deal soon, and this is expected to be a positive. There are hopes of the Govt broadening the production-linked incentive scheme to other low-tech manufacturing sectors (toys, furniture, footwear, etc.) too.
However, sectors that are exposed to external risks and US-centric developments, like the information technology sector, feature prominently in the ‘avoid’ list of many brokerage reports. Interestingly, Jefferies has also termed India as a strong contender of the anti-AI play.
Key risks for 2026
The prospects for the markets is seen as significantly better in 2026 compared to 2025, but there are some risks that the street needs to watch out for. The key downside risks include FII outflows continuing, higher oil prices, monsoon-driven food price shocks, rising household indebtedness and weaker global growth. But Nomura, in its growth forecast outlined that there are some possibilities that “India sees a faster-than-expected revival in private capex, US tariffs being reduced to 15% and sharply higher global growth.” All of these would then lift investor sentiment even higher.