The Nifty‘s 12-month forward PE multiple stands at 20.4 times, virtually unchanged from a year ago, after two consecutive years of lackluster profit growth. Now, as the Q3 earnings deluge begins from next week, analysts are hopeful that India Inc can deliver the comeback that could reignite the market.
“After two muted years, Nifty earnings are set for a sharp rebound, with consensus placing India among the fastest-growing markets globally,” said CLSA analyst Vikash Kumar Jain. “Banks should anchor the recovery, with telecom and metals adding heft. While risks remain, including slower credit growth, NIM compression, tariff delays and INR-driven margin pressures, the earnings tide finally looks poised to turn.”
Morgan Stanley’s equity strategist Ridham Desai struck an even more bullish note: “We see a sharp turn in earnings growth over the coming months. India’s growth cycle is set to accelerate backed by reflation efforts of the RBI and the government via rate cuts, CRR cut, bank deregulation and liquidity infusion, front loading of capex and a near Rs1.5 trillion in GST rate cuts.”
For the first time in nearly five years, Desai noted, equity valuations look favorable relative to short-term interest rates, with the modified earnings yield gap pointing to equity upside.
IIFL Securities echoed the optimism saying that while Nifty PE multiples are almost where they were a year ago, the chances of earnings upgrades are much brighter now, and that Nifty should deliver 15% from here. The brokerage highlighted “coiled springs in Nifty earnings” including IndiGo, Tata Motors, banks and metals that should help the index deliver 15% gains easily.
But not everyone is convinced the turnaround is imminent. Nuvama warned that Q3 earnings are “likely to stay soft—a continuation of the previous six quarters,” forecasting subdued top-line growth of around 8% year-on-year for the eleventh straight quarter and profit growth of just 5%. The brokerage said Nifty earnings per share is likely to be flat year-on-year, “posing downgrade risks to consensus estimates of mid-teens profit growth.”The divergence in views reflects a market at an inflection point. After India’s record underperformance relative to global peers in 2025, CLSA’s Jain noted that “India’s relative valuation to peers now seems more palatable,” which could revive investor interest, particularly as a hedge against risks like global AI-trade consolidation.
Yet the setup is precarious. Equities remain expensive relative to bonds, according to CLSA, “leaving a thin margin of safety.” Without a meaningful decline in bond yields, index-level returns are likely to remain capped, making earnings delivery, rather than multiple expansion, the primary driver of equity performance in 2026.
“Headline market valuations remain elevated, limiting upside at the index level,” Jain added. “Entering 2026, markets are priced for stability rather than surprises, making them more vulnerable to earnings disappointments than positioned for rerating.”
The earnings picture for 2025 has already deteriorated sharply. CLSA noted that consensus FY26 estimates are down significantly, led by smallcaps, “marking the weakest growth outlook in four years.” While policy support slowed estimate cuts for large caps and midcaps even saw upgrades, small-cap forecasts “still look stretched, hinging on a turnaround that recent performance doesn’t justify.”
Axis Securities’ Neeraj Chadawar maintained a December 2026 Nifty target of 28,100, valuing the index at 20 times December 2027 earnings. “Based on the expectations of the earnings upgrade starting from Q3FY26 onwards, we see upside risk to our target,” he said, though he cautioned that volatility could persist in the short run.
The recovery theme for FY27 appears more consensus-driven. CLSA expects revenue momentum to return after a muted FY26, with broad-based recovery led by real estate, industrial and consumer discretionary sectors. Margins should improve modestly, though returns on equity will remain capped as corporates continue to deleverage rather than pursue aggressive capital expenditure.
“The downgrade cycle is easing as domestic demand and policy support stabilize expectations,” Jain said, noting that 2026 may be more about the impact of 2025’s policies rather than new initiatives, barring possible trade deals with the U.S. and European Union.
IIFL Securities warned that while they expect foreign institutional investor selling to abate, “China is cheap and an innovation heavy economy and its multiples don’t reflect a premium for this yet.” India will get its share of flows, “but nothing disproportionate.”
The consensus is clear on one point: 2026 will reward stock selection over broad index bets. “The excesses of prior years have corrected unevenly,” CLSA’s Jain said. “While the index looks expensive, relative valuation dispersion across stocks and sectors has widened. Opportunities increasingly lie in stock selection rather than broad market exposure.”
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)