What will the markets bring in 2026 for India? | Number Theory

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Global equity markets ended 2025 on a strong note, but the rally was uneven and driven by a narrow set of themes. India, despite solid economic growth and robust domestic participation, was one of the weakest performers among major markets. As 2026 begins, the question is whether easing global headwinds and improving earnings will help Indian equities regain lost ground.

The Bombay Stock Exchange building. (PTI)

What will the markets bring in 2026 for India?

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  Globally, the Indian market was a weak performer in 2025

  India ended 2025 as the weakest performer among major equity markets, trailing well behind the US, Europe and several Asian peers. While global markets were buoyed by a narrow but powerful AI-driven rally in technology stocks, Indian indices struggled to find a similar engine of momentum. Returns were weighed down by a mix of global and domestic factors, including subdued corporate profit growth. Recurring bouts of trade tensions with the US added to the uncertainty, particularly for export-linked sectors. The result was a year in which returns from the Indian markets fell short of gains from other major economies.
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  A narrow tech rally has set the tone globally

  Although global equities beat India in 2025, their gains were far from broad-based. One way to see this is the Nasdaq to Dow Jones ratio, which divides the tech-heavy Nasdaq by the more old-economy Dow. When the ratio rises, it signals that technology stocks are pulling ahead of the wider market. By late 2025 the ratio had climbed to about 0.49, higher than the dotcom-era peak of around 0.46 and the highest level in the series. In other words, the US rally has been increasingly concentrated in tech, fuelled by AI exuberance, while more traditional sectors have lagged. Because US indices serve as the global benchmark, this concentration has shaped sentiment far beyond America. A detailed analysis of the global AI frenzy was printed in the December 29, 2025 of this column. India, with a market that is still dominated by financials and old economy sectors, has had limited direct exposure to this tech-led surge.
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  Earnings of India Inc remain patchy but could turn in 2026

  Corporate earnings were a persistent weak spot for Indian markets through 2025, with profit growth remaining uneven despite a few late improvements. Large-cap earnings growth spent much of the year in the low to mid-teens after the strong post-pandemic surge, while mid-cap profits were volatile and small-cap earnings frequently slipped into contraction. This lack of broad-based momentum weighed on market confidence, even as the wider economy stayed resilient. The outlook for 2026, however, looks more supportive. With fiscal and monetary tightening largely behind it, growth is expected to firm without reigniting inflation. As Axis Capital noted in its 2026 outlook, “the end to earnings cuts” could help drive “12-month-forward index EPS higher by 14% over CY26E.” In practical terms, this suggests that profit downgrades may be behind the market, allowing earnings expectations to rise again if demand, margins and investment hold up. Strong GDP growth, lower inflation and recent GST rate rationalisation should further support this recovery by easing cost pressures and lifting consumption.
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  Will foreign funds return in 2026?

  Foreign institutional investors were a major drag on Indian equities in 2025, with net selling in shares amounting to about ₹1.66 lakh crore, the largest annual outflow on record. The pressure began early, with heavy net selling of over Rs.78,000 crore in January 2025 alone, and despite intermittent inflows in April, May, June and October, outflows resumed sharply through much of the year. At the same time, domestic institutional investors stepped up sharply, absorbing a large share of the selling and helping to limit deeper market declines, Indian mutual funds itself made net investments close to ₹5 lakh crore during the year. Whether foreign flows in 2026 will depend less on sentiment and more on conditions. A stabilisation in global interest rates, a less dominant US dollar and easing trade frictions would make India relatively more attractive. Equally important will be whether Indian equities become more compelling on fundamentals. According to the Equity Market Outlook 2026 report by HSBC Mutual Fund, “with better earnings growth in FY27 and a potential trade deal with the US,” we could see FIIs returning to the Indian markets.