“Financials can lead, but other sectors have the potential to perform equally well. Manufacturing and pharma, for instance, remain strong. Even within banking, there is scope for continued growth,” Khemani told ET Now. “The encouraging part of the current market is widespread participation. If one sector slows down temporarily, another catches up, which makes the rally very interesting.”
Khemani also highlighted the role of large-cap and mid- and small-cap stocks. “When sentiment turns negative, large caps tend to hold up better. When risk-on sentiment returns, mid- and small-caps typically outperform. Currently, pessimism is high, cash is sitting on the sidelines, and shorts are abundant. If tariff issues get resolved in the next three to six months, we could see strong short-covering and renewed buying,” he said.
On earnings, Khemani is optimistic. “Despite the narrative of corporate slowdown, last year’s earnings were impacted mainly by liquidity issues and reduced government spending. Those factors have reversed now, and measures like GST rate cuts and liquidity infusion can boost earnings. On a 2025–26 basis, overall earnings could grow around 13–14%, with some sectors outperforming.”
The IT sector, Khemani noted, has been consolidating due to ongoing technology transformations. “Large-cap IT may only generate single-digit to early teen returns sustainably. However, mid- and small-cap IT companies, especially those in SaaS, ER&D, and product-oriented segments, offer better growth potential. Each market cycle brings new companies into prominence, like Persistent, which scaled significantly over the past decade. Identifying these pockets early is key.”
Khemani concluded that the current market setup—with broad participation, improving earnings, and manageable macro overhangs—favors investors positioned for upside rather than downside.
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