Ajay Menon, the Managing Director and CEO of Wealth Management at Motilal Oswal Financial Services Limited (MOFSL), has projected a pivotal shift for the Indian equity markets in 2026. He asserts that the market performance will be steered primarily by corporate earnings growth rather than valuation expansion, marking a transition from the recent phase of consolidation.
Earnings Revival to Power Market in 2026
Menon, in a detailed conversation, outlined that after a year of consolidation in 2025, Indian equities are poised to enter a more constructive phase. The key driver will be a broad-based improvement in corporate earnings growth, supported by a favourable domestic policy environment. He noted that the earnings slowdown observed over the past five quarters is likely bottoming out.
Growth is expected to gradually extend beyond a narrow set of sectors. This revival will be fueled by improving domestic demand, the positive effects of operating leverage, and the benefits of GST rationalisation reflecting in profitability. On the macroeconomic front, monetary easing, liquidity infusion, and continued policy support are anticipated to create a more supportive backdrop for consumption.
Menon forecasts Nifty earnings growth of 12% year-on-year in FY26 and 15% in FY27, which he considers reasonably well-placed. He highlighted that aggregate earnings revisions have turned positive, with FY26 Profit After Tax (PAT) upgraded by nearly 2%—the first upgrade since the first quarter of FY2025.
Valuations and Sectoral Preferences
The market expert pointed out a clear divergence in current valuations. Large-cap stocks, represented by the Nifty 50, appear comfortable after a period of consolidation. The index is trading close to its long-term average multiple, indicating a better balance between price and improving earnings visibility.
In stark contrast, valuations in the broader small and mid-cap (SMID) space remain elevated. The Nifty Midcap-100 is trading at a roughly 25% premium to its long-period average, while the Nifty Smallcap-100 trades at a significant 50% premium. Consequently, Menon believes large caps are better positioned as the earnings cycle improves, while investing in SMIDs will require much sharper and more selective stock-picking.
External Factors: Trade, Geopolitics, and Foreign Flows
Menon also shared his perspective on several external variables that could influence the market. A delay in finalising a comprehensive India-US trade deal until March 2026 is likely to keep near-term sentiment cautious, especially for export-oriented sectors. However, markets have largely priced in extended negotiations, and the impact is expected to be sentiment-driven rather than fundamentally disruptive.
On the geopolitical front, an end to the Russia-Ukraine war would be a macro-positive for India. It would reduce uncertainty in global energy and commodity markets, leading to more stable crude oil prices. This stability would support India's inflation outlook, current account balance, and ease input cost pressures across the economy.
Regarding foreign institutional investor (FII) flows, Menon stated that sustainable buying would depend on a mix of domestic and global factors. Domestically, a recovery in corporate earnings, currency stability, and positive signals from the Union Budget are key. Globally, a dovish monetary stance from the US Federal Reserve and the European Central Bank would be supportive for emerging market flows.
The "Reverse AI" Cycle Opportunity
Menon introduced an interesting concept of a potential "reverse AI" cycle that could benefit Indian markets. He explained that while India had limited exposure to the initial hardware-driven phase of the global AI boom, the next adoption-led phase could play to its strengths. As global AI spending shifts from infrastructure build-out to enterprise-level implementation, demand will move toward software and services.
Indian IT services companies are well-positioned to capture this demand, with AI-related revenues likely to contribute more meaningfully in the coming quarters. This shift could help narrow performance gaps and support India's participation in the broader AI investment theme, providing a fresh impetus to the technology sector.
