Dear reader, as 2025, a year of global tumult and volatility, rolls by, Mint's reporters and columnists look around the corner on what is coming in 2026—to help you know what to expect and prepare for it. Tell us what you think at feedback@livemint.com.
The Nifty 50 and S&P BSE Sensex are among the worst performers globally, even as markets elsewhere surge: South Korea’s Kospi leads with 67.5% gains in 2025 so far, followed by Brazil at 31.6% and Hong Kong’s Hang Seng at 28%.
Indian equities trailing global peers this year has prompted investors to ask whether this is a passing phase or a deeper trend. Money managers say it’s hard to call either way, but one thing is clear: this is firmly a stock picker’s market.
The year is likely to unfold in two phases, with the first marked by lack of direction despite improving domestic conditions and valuations, as global headwinds cap upside, said Aashish Somaiyaa, chief executive officer, WhiteOak Capital Asset Management.
Once the uncertainty surrounding the US economy and global politics clears, he expects markets to bounce back. Significant foreign investment will likely return only after global markets see an imminent correction.
Foreign institutional investors (FIIs) have swung between buying and selling this year, net selling in five of the 11 months through November and buying in six. After three straight months of selling till September 2025, they turned net buyers in October and November, only to slip back into selling mode again this month up to 15 December, NSDL data showed.
In contrast, domestic institutional investors (DIIs) have remained steady buyers throughout 2025, though the pace of inflows has eased since November. October saw the strongest DII inflows of 2025, the data showed.
“I wouldn’t call it fear but more an expectation that markets are headed for a correction emanating mostly out of US economic and market conditions and US economic conduct,” said Somaiyaa.
What to keep an eye on?
The key indicators to watch are corporate earnings growth, said Nilesh Shah, managing director of Kotak Mahindra AMC. He is of the opinion that earnings are expected to rebound to double-digits in FY27 after a muted 2025, anchored by rural recovery, government capex, and consumption pickup.
He pointed out two factors to watch out for in 2026. Firstly, will global investors take money out of US assets as the dollar has weakened and is likely to weaken more with policy uncertainty in US, and second is will Chinese markets continue to rally and attract foreign capital?
“If we are lucky, there could be a return of FII flows as investors book profits in the US and China markets,” said Shah.
FII inflows are expected to revive as global rate cycles ease, US growth cools, and the overhyped AI trade abroad moderates, making India’s growth premium attractive again, he said. While systematic investment plans (SIPs) and retail flows will anchor the market, a sustained FII return will determine whether equities break out or stay range-bound.
Domestic liquidity remains solid, and FIIs are expected to turn buyers in 2026, according to Shah, as the dollar weakens and global risks recede, which should help support liquidity and narrow India’s relative underperformance.
Which sectors look good in 2026?
Meanwhile, some market experts noted that the most vulnerable sectors are those exposed to high interest rates or a global slowdown, particularly export-oriented and commodity-linked segments.
Kalpen Parekh, managing director and chief executive officer, DSP Mutual Fund, feels that sector outcomes in 2026 are likely to be driven by earnings visibility rather than narratives.
Areas linked to domestic investment and manufacturing, such as capital goods, select industrials and engineering-led businesses, offer reasonable visibility, backed by multi-year order books and public capex, he said. Financials remain core to portfolios, though leadership may become more differentiated, with balance sheet quality and underwriting discipline taking precedence over pure loan growth.
In contrast, globally sensitive and commodity-linked sectors could face pressure if demand slows or input costs turn volatile, while richly valued pockets pricing in high growth may see higher volatility, he added.
- India enters 2026 trailing significantly behind global peers like South Korea and Brazil.
- Markets are expected to remain range-bound in H1 due to global headwinds, with a potential breakout in H2 as the US economic outlook clears up.
- While retail SIPs provide a floor, a sustained market rally depends on the return of FIIs, who have been inconsistent throughout 2025.
- Double-digit earnings growth is expected to return in FY27, driven by rural recovery and government capital expenditure.
- Investment preference is shifting toward domestic manufacturing, capital goods, and financials with high underwriting discipline.
Biggest fear in 2026
Kotak’s Shah said, “The biggest fear is prolonged global volatility delaying FII return or another earnings downgrade cycle—though risks seem priced in now.”
According to Parekh of DSP Mutual Fund, the biggest risk is anchoring portfolios to the last cycle’s experience, while the biggest opportunity lies in rebuilding them around durability rather than momentum.
Businesses with strong balance sheets, predictable cash flows, and pricing discipline tend to compound steadily through cycles, he said.
“For investors willing to look beyond short-term noise, this phase offers a chance to reset expectations and construct portfolios with a better balance between growth and resilience.”
A 3 December BofA Securities report said, “Risks are skewed to the upside” due to potential reforms, a likely reversal in FII outflows and the events calendar, though any downside could trigger a “sharp SMID cap correction”. SMID refers to small- and mid-cap stocks.
BofA expects the Nifty 50 to rise about 11% in 2026, with large-caps outperforming small and mid-caps as in 2025, while select SMID opportunities may emerge in financials, healthcare, batteries, real estate, chemicals, durables, jewellers and hotels.