Speaking to Kshitij Anand of ETMarkets, Nitin Bhasin, Head of Institutional Equities at Ambit, and Bharat Arora, Lead – Strategy at Ambit Capital, share why 2026 is shaping up to be a year of moderation rather than acceleration.
They explain how normalising earnings growth, rising market concentration, and stretched valuations are likely to result in muted headline returns, sharper stock-level dispersion, and a renewed preference for large-cap quality as investors recalibrate expectations for the next phase of the market cycle. Edited Excerpts –
Q) Well, we have hit fresh record highs in November with about 10% gain so far in the year. How are we placed for 2026?
A) After a strong run to record highs, 2026 is likely to be a year of continuation of moderation, not acceleration. Our work shows earnings growth persistence is rare, and FY26–27 EPS estimates have already been cut meaningfully.
Rising market concentration historically precedes slower GDP and EPS growth, pointing to weak breadth and lower median stock returns.
The GRIP framework also signals caution as growth normalizes, risk premiums reverse and positioning crowds into quality. Expect muted returns with sharp dispersion across equity cohorts with large cap expected to outperform midcap!
Q) Gold and silver outperformed by a wide margin in 2025. How will precious metals play out in 2026? Any triggers to watch out for?
A) A meaningful near-term trigger is the recent regulatory change permitting NPS funds to invest in gold and silver ETFs, which could structurally raise domestic institutional allocations to precious metals in 2026.
This comes alongside continued global central bank accumulation of gold, which remains a supportive medium-term demand driver.
However, history suggests that precious metals can go through prolonged phases of range-bound or muted returns, and return visibility remains lower relative to financial assets.
Against a backdrop of elevated market volatility, geopolitical uncertainty, and rich equity valuations, gold—and to a lesser extent silver—can continue to serve as portfolio hedges and potential safe havens for institutional investors.
Q) Rupee hit a fresh low against the USD surpassing the 90 mark. Are we on our way to breach the 100 mark against the USD. What is causing the fall?
A) Rupee’s fall can be attributed to delayed US- India Trade Deal, gold imports and weak exports led widening trade deficits, subdued capital inflows caused by foreign investment outflows and reduced central bank intervention in the FX market.
Given that India is an energy dependent country that always runs a trade deficit, rupee will always have depreciating tendency (3.1% median depreciation in last 20 years) but it is unlikely to reach the 100 mark in the near term.
Rupee will undergo a further depreciation of 1% to 1.2% in line with historical trends, potentially reaching a level of Rs91.2/USD by the end of Mar’26.
Q) Which sectors are likely to hog the limelight in 2026? Sectors that are likely to lead rally.
A) 2026 leadership is likely to be narrow and quality driven. As earnings growth normalizes and market concentration rises, FMCG, Healthcare and IT are best placed to lead.
These sectors offer reasonable earnings visibility, balance-sheet strength and have historically outperformed during periods of slowing growth and rising concentration.
Nifty IT’s underperformance w.r.t Nifty has reached historical troughs, with empirical evidence suggesting ~7% relative outperformance for IT over the next 12-months.
Also, global CEO confidence index declined to one of its lowest ever levels in June-25, and has been a strong contrarian indicator with IT index delivering outsized returns (49%/36% average/median), 12-months post index trough.
DMF flows are already tilting toward these quality pockets, reinforcing relative performance. Utilities could also do well on defensiveness and stable cash flows.
Q) Any themes or sectors which have already run up in 2025 and investors will be better off paring stake in those themes?
A) Yes, investors should consider pairing exposure to themes that ran hard in 2025 on valuation re-rating as compared to earnings.
This includes SMID cyclicals (Capital Goods, Metals, Autos ancillaries, ) and also Defence, where prices have moved well ahead of earnings persistence.
With FY26–27 downgrades accelerating and market concentration rising, these pockets are vulnerable to de-rating. Booking profits and rotating into large-cap quality sectors is a sensible risk-management move for 2026.
We don’t see any near-term triggers in these sectors to help sustain elevated valuations.
Q) Mainboard initial public offerings (IPOs) have hit the 100-mark milestone (including SME) for the first time since 2007, raising nearly Rs 2 lakh cr mark. What are your expectations of 2026?
A) The IPO frenzy shows no signs of stopping in 2026, with close to 53 companies currently in the pipeline having filed their DRHPs.
Institutional investors’ appetite for fresh equity issuances has risen materially over the past two years, partly reflecting exorbitant valuations across large segments of the secondary market.
However, stocks listed over the past 2 years have not been immune to the recent market correction. A majority of IPOs listed in CY24 and CY25 have witnessed meaningful drawdowns, with approximately 66% and 62% of stocks, respectively, delivering negative returns relative to their listing prices.
Importantly, the quality of companies coming to market has deteriorated materially compared with earlier cycles. Median three-year cumulative pre-tax CFO-to-EBITDA conversion has declined sharply—from 102% for CY13 listings to just 59% for CY25 listings.
In this environment, stocks with superior cash conversions have relatively outperformed those that rank poorly on this metric, a trend we expect to persist through 2026.
Q) What were your big learnings from the year 2025 you would want to share with readers?
A) An extended market rally cannot be sustained in the absence of earnings support. While this may sound obvious, such foundational principles are often overshadowed in narrative-driven markets.
Market corrections tend to precede slowdowns in economic and earnings growth—a pattern that played out in 2025 as well.
We had been highlighting to our clients about the market excess for quite some time before the its peak in Sept-24.
The early phase of the broad-based post-pandemic rally was underpinned by record-high profit contributions from the SMID universe, driving market concentration to historic lows.
However, in the run-up to the peak, multiple expansion became the primary driver of returns—a dynamic that has rarely proven sustainable beyond a few quarters.
In the current environment, prioritizing exposure to segments with higher certainty and visibility of earnings growth is more critical than chasing the absolute magnitude.
Our broader outlook on equities remains cautious for 2026, but select pockets of the market continue to offer an attractive convergence of reasonable valuations and predictable growth.
Q) What will be the big triggers for equity markets in 2026?
A) We believe CY26 will continue to be a year of earnings growth normalization, with market returns being extremely polarized.
Our GRIP framework continues to suggest a cautious stance on equities and asset allocation in favor of bonds.
The US-India trade deal can provide a near-term bounce whenever it materializes but our returns expectations for the year continue to remain muted.
Large pockets of the market continue to trade at unsustainable valuations, especially with a broad-based slowdown in earnings growth.
Agencies(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)