Why the bottom is likely in
Karki’s confidence in the market’s floor rests on a historically reliable signal. Every time the Nifty’s price-to-earnings ratio has dropped below 20, it has marked a credible bottom. That is precisely what happened around the budget, and the subsequent sequence of events reinforced the case. A Union Budget tilted firmly toward manufacturing and investment, a central bank signalling improving inflation and GDP trajectory, and a trade deal coming together — these three developments collectively point to stronger nominal GDP growth ahead, which is the fuel that drives corporate earnings and market re-ratings.
Talking to ET Now, Karki said: “If you tie up these three things, it is largely tailwinds for manufacturing, investments and nominal growth.” He added that daily volatility should not be mistaken for a market still in freefall. The broad direction, in his view, has turned.
Mid and smallcaps: Growth or nothing
The more uncomfortable message from Karki concerns the mid and smallcap space, which has been a source of enormous wealth creation — and anxiety — over the past three years. His assessment is blunt: this is no longer a value play. It is a pure growth bet.
The reason is arithmetic. Despite the correction in calendar year 2025, the three-year CAGR for midcap and smallcap indices still shows a 10–12% outperformance over the Nifty. The excesses built up in 2023 and 2024 have not been fully unwound, and valuations in this segment remain stretched. That does not automatically mean underperformance — earnings growth expectations for the smallcap and midcap space through FY26 to FY28 are running at around 20%, compared to roughly 14–15% for the Nifty. If that growth materialises, prices can hold or rise even at elevated multiples.
But the margin for error is zero. “Wherever there will be growth faltering in the smid space, there will be no margin of safety,” Karki said. Companies that miss will be punished sharply, with no valuation cushion to absorb the disappointment.
The two zones worth owning
For investors looking for the rare combination of improving growth outlook and reasonable valuations, Karki has consistently pointed to two spaces — and both are now beginning to show results.
The first is financials. Banks and financial services stocks have started outperforming, with some names hitting all-time highs. The NPA cycle is bottoming out, NIM compression is largely behind the sector, credit growth is running at 12–14%, and valuations remain well below cycle peaks. Karki sees this as one of the cleanest risk-reward setups in the large-cap market today.
The second is the domestic cyclical cluster — capital goods, infrastructure, industrials, select commodities like cement, steel, wires and cables. Order books are growing, volume surprises are coming in, and the companies feeding India’s investment cycle are delivering earnings upgrades. With nominal GDP recovering from last year’s subdued 8% growth, this segment is structurally well-placed.A third, more selective pocket is discretionary consumption — specifically premium consumption and autos — where volume growth remains healthy even if valuations are not cheap. Karki’s logic here is straightforward: as long as growth keeps coming in, markets will tolerate elevated multiples. Derating only happens when growth disappoints, as is now playing out painfully in IT services.
IT: A bottoming process that will take time
On technology stocks, Karki offers a carefully measured view that is neither dismissive nor enthusiastic. Valuations in large-cap IT are becoming interesting — several names are drifting back toward the 15–20 times PE range they occupied comfortably before the pandemic-era digitalisation boom inflated expectations. Dividend yields and free cash flow yields are improving.
But he draws on a consistent historical pattern to counsel patience. Once confidence in a sector’s growth trajectory is broken, the bottoming process is slow and painful. It does not resolve in a month or two. IT services is in that phase now — growth concerns are real, the derating is active, and the sector needs to find a new floor before it can build a recovery narrative. Large-caps are closer to that floor than mid-cap IT names, which in Karki’s view have not yet reached comparable valuation comfort.
The message to investors eyeing IT bargains: the stocks are getting interesting, but trying to call the exact bottom is a difficult game.
Gold, silver and the geopolitical wild card
Asked about precious metals, Karki offered a frank and grounded perspective. Gold’s multi-year rally, in his view, has been fundamentally driven by central bank demand — a structural shift in reserve management away from pure dollar dependence. That demand is real and persistent. Whether it continues from here will depend heavily on the trajectory of US relations with BRICS nations and other major economies. A more conciliatory Trump administration reduces gold’s urgency as an alternative reserve asset. A more confrontational stance keeps the structural bid alive. On silver, Karki candidly acknowledged uncertainty about the primary driver — a rare but refreshing admission from a strategist in a world full of confident forecasts.
The takeaway
Karki’s framework for this market is disciplined and internally consistent. The macro floor is in, nominal growth is recovering, and the three zones of financials, domestic cyclicals and select discretionary consumption offer the best combination of growth and valuation today. Mid and small-cap investing has become a higher-stakes growth bet with no safety net. IT requires patience. And the overall market, while past its worst, will reward stock selection far more than passive exposure.