The Indian stock market has faced a challenging year, trailing behind several major global indices. This underperformance stems from a confluence of factors including worries over US tariffs, significant outflows of foreign capital, high valuations, and lackluster corporate earnings. Despite these headwinds, a sense of optimism is emerging among experts that the worst may be over. There is a growing expectation of a robust market recovery in the coming year, fueled by a rebound in earnings and the potential for a favorable trade agreement between India and the United States.
Earnings Recovery to Drive Market Momentum
Mythili Balakrishnan, co-fund manager at Alchemy Capital Management, in an exclusive conversation with Mint, outlined a positive trajectory for corporate profits. She indicated that several key factors are aligning to signal an earnings revival starting from the third quarter of the financial year 2025-26 (Q3FY26).
The foundation for this optimism is visible in the recent quarterly results. The profit after tax (PAT) for the Nifty 500 index demonstrated a strong growth of nearly 16% in Q2FY26. Balakrishnan expects this healthy trend to continue in the second half of FY26, particularly in consumer discretionary sectors, which are likely to benefit from recent reductions in Goods and Services Tax (GST). Improved consumer sentiment is already translating into stronger sales across the automobile industry, encompassing passenger vehicles, two-wheelers, and commercial vehicles.
Furthermore, sectors like defence, power, and capital goods are reporting robust order books, providing clear visibility for execution and earnings growth. A favorable turn in currency trends is also poised to support revenue and margin improvement for the Information Technology sector.
Navigating Risks and Identifying Opportunities
While domestic fundamentals appear strong, Balakrishnan highlighted external risks that could inject volatility. The most significant among these is the prolonged delay in securing a trade deal with the US. As the US advances agreements with other partners, uncertainty around tariffs and market access puts Indian export sectors like gems and jewellery, chemicals, textiles, and engineering goods at a disadvantage. This ambiguity could also dampen capital expenditure plans in export-linked industries.
On the macroeconomic front, India's backdrop remains supportive with steady domestic demand and healthy corporate balance sheets. Notably, mid- and small-cap companies outperformed in Q2FY26, posting earnings growth of more than 20%, aided by operating leverage and lower input costs for commodities like coal, oil, and steel.
Investment Themes: AI, Currency, and Alpha Sectors
When asked about Artificial Intelligence as an investment theme, Balakrishnan affirmed its long-term potential but noted that direct, pure-play AI opportunities in India's listed space are currently limited. Most exposure is indirect, through enablers like IT services firms investing in AI-led productivity, electronics manufacturing services (EMS) companies, and infrastructure builders for data centers and cloud computing.
Regarding the Indian rupee touching historical lows, she advised long-term investors to maintain a balanced portfolio. Export-oriented companies in IT services, pharmaceuticals, and engineering can act as natural hedges during periods of currency weakness. However, she cautioned against trying to time the volatile forex market, advocating for a disciplined allocation strategy instead.
For alpha generation in 2026, Balakrishnan pointed to sectors with improving earnings visibility and reasonable valuations. These include industrial and investment-linked segments like defence and power equipment, export-oriented sectors such as specialty manufacturing and pharmaceuticals, and capital-market intermediaries benefiting from the deepening financialisation of the economy. She emphasized that alpha is likely to be stock-specific, favoring companies with strong pricing power, resilient balance sheets, and consistent execution.
