The year 2025 was a turbulent period for financial markets worldwide, defined by policy shifts and significant volatility. While global indices surged, the Indian stock market presented a contrasting picture, trailing behind its international counterparts. As we step into 2026, market analysts are decoding the factors that will shape India's equity landscape in the coming months.
2025 in Review: A Year of Global Gains and Indian Underperformance
Globally, 2025 was a rewarding year for investors, fueled by an artificial intelligence-led rally, supportive local policies, and a re-rating of valuations. Key markets like South Korea, Brazil, and Japan emerged as top performers. Even major economies such as the United States (S&P 500), China, and Europe registered impressive double-digit returns.
In stark contrast, Indian benchmarks struggled to keep pace. The Nifty 50 managed a gain of approximately 10%, while the Sensex rose by about 8%. This underperformance was particularly evident in the small-cap segment, which underwent a meaningful correction. This shift reflected a necessary normalization of lofty valuations and a phase of earnings downgrades, while large and mid-cap stocks showed relative resilience.
The 2026 Forecast: A Selective Market Awaits
Market veterans anticipate that 2026 will continue to be a stock-picker's market. The global environment will remain influenced by the trajectory of interest rates, evolving trade policies, and persistent geopolitical risks.
Nikhil Khandelwal, MD of Systematix Group, highlighted the domestic focus. He stated that "earnings growth, domestic liquidity, and progress in private-sector capital expenditure will be key variables to watch." He believes the market will favor firms with robust balance sheets, predictable cash flows, and disciplined capital allocation. The consolidation seen in 2025, therefore, might lay the groundwork for more sustainable, quality-driven returns rather than a broad-based rally.
Top Five Drivers for the Indian Market in 2026
According to a detailed report titled '2026: A better year for Indian stock market' by Geojit Research, five primary factors will steer market direction this year.
1. Steady GDP Growth and Policy Support: India's economy is projected to maintain steady growth, supported by strong domestic demand and controlled inflation. Initiatives like potential income tax cuts, GST rationalization, and the upcoming 8th Pay Commission are expected to boost household disposable income, spurring consumption.
2. Persistent External Headwinds: Geopolitical tensions and a tariff-heavy global trade environment continue to pose risks. U.S. tariffs have impacted manufacturing nations and global growth, while Mexico's 50% tariff on Indian imports adds complexity. China's blocking of critical minerals further strains supply chains.
3. The Exponential Rise of AI: The adoption of Artificial Intelligence is accelerating across sectors like tech, finance, and healthcare. With expanding use-cases and strong earnings visibility, AI's long-term fundamentals remain robust, supporting the next phase of growth for related companies.
4. Liquidity Boost and Economic Strength: The Reserve Bank of India (RBI) adopted an accommodative stance in 2025, cutting the repo rate by 125 basis points to 5.25%. With a subdued inflation outlook, further cuts in 2026 are possible. Improved system liquidity, aided by CRR cuts and open market operations, has upgraded the outlook for banks.
5. A Return to Positive Earnings: The phase of earnings downgrades appears largely over. Government reforms are expected to realign the corporate earnings outlook. Any positive resolution to global trade impasses could act as a major external trigger for markets.
Nifty Target and Concluding Outlook
Geojit Research notes that the Nifty50 is currently near its December 2025 base case target of 26,500. Looking ahead, the firm has marginally upgraded its base target for December 2026 to 29,150, implying a year-on-year return of about 12%. This projected growth is expected to be driven by a pickup in private capital expenditure, a recovery in the earnings cycle, and a moderation in global risk factors.
In summary, 2026 is poised to be a year where domestic fundamentals, selective investing, and navigating global crosscurrents will determine portfolio success in the Indian equity market.
