For evidence, one does not need to look much further than the sharp divergence between the momentum and value indices. Consider this: the Nifty 500 Momentum 50 index has underperformed its value counterpart by more than 15% this year. The Nifty 500 Value 50 index delivered over 11% positive YTD returns, whereas the Momentum 50 index posted a decline of around 4%. This dispersion is typical of a sideways market, where broad momentum tends to fade, and stock-specific action takes the lead. In such phases, momentum loses steam while value-driven strategies usually take the centre stage.
So, the big question now is: will this continue in 2026?
In 2025, the market pause was driven by the combination of steep valuations and slowing earnings visibility, and it was a straightforward case for consolidation. However, the outlook for 2026 is far more nuanced with the prospect of a potential return of momentum, though unlikely to match the feverish one-way rally of 2024.Looking back, in 2025, the massive FIIs sell-off was primarily driven by two factors:
Expensive Multiples & Slowing Earnings: India’s equity market was trading at a premium just as earnings growth began to falter, making it a fertile ground for profit booking.
The AI Trade Rotation: FIIs actively shifted capital to other emerging markets, including China, Taiwan, and Korea etc., where the AI narrative was taking centre stage. India, lacking a strong AI story, was seen as a relative underperformer.
This capital rotation dramatically impacted India’s standing in the emerging market index. India’s weight in the MSCI Index plummeted from a peak over 20% in 2024 to about
16% after the 2025 rotation, while China’s weight climbed substantially to nearly 30% from its low of 24% odd level in 2024.
Looking ahead, one believes that the cycle could turn again in 2026 – this time in India’s favour. Several factors have started to align:
To start with, the rupee’s depreciation cycle appears to be peaking and the stable currency with an upward bias could provide much needed support to FII flows. Then comes the expected cooling of global AI trade in the next year (initial signs are already visible going by Nov correction in AI-heavy stocks in Nasdaq), and finally the prospect of sharp recovery in domestic earnings from FY27 on the back of GST reforms and the prospect of next round of rate cuts.
Against this backdrop, it is hard not to build a constructive case for FIIs’ return. With the combo effect of steady domestic flows and the FIIs return, in all likelihood, the momentum is likely to come back in 2026.
But will it be the kind of one-way momentum we witnessed in 2024?
It is very unlikely, given the slow and gradual improvement in earnings growth. Not to forget that India still continues to trade at a premium relative to historical averages, even after the moderation in valuation during the recent consolidation phase.
So, what does that mean for 2026?
In all probabilities, one could see 2026 shaping up as a blend – a mix of momentum and value. Not the runaway momentum of 2024. Neither the tight sideways grind of 2025.
Instead, a market where:
- Some momentum returns with FII re-entry,
- But value and stock-specific investing continue to do well,
- Plenty of bottom-up opportunities in the broader markets for alpha creation.
To summarise, 2026 could be shaping up to be a balanced year – neither a momentum runaway nor a dull consolidation, where both value and momentum will have a role to play. It is difficult to say which one will outsmart. Only time will tell. Exciting times ahead!
(The authot is Founder, CEO & Fund Manager, TrustLine Holdings Pvt Ltd)