Market outlook: Dalal Street is gearing up for an upswing in 2026 — Here's why

The past two weeks witnessed sustained bullish and bearish sentiment in Indian equities. Positivity was underpinned by stronger Q2 earnings, easing inflationary pressures, and optimism surrounding India–US trade negotiations. A moderation in FII selling, driven by expectations of earnings upgrades in H2FY26 and the narrowed valuation of India compared to peers, lent further support to the market.

However, volatility was triggered again whenever the market neared the all-time high. This was either led by global cues, scenario over potential delays in trade talks or expectations on the central bank’s next policy. The market used to eagerly look for data like better-than-expected U.S. non-farm payroll reports and commentaries by Fed governors to scale back expectations of a December Fed rate cut.

This triggered selling pressure in safe-haven assets too, like gold, and pushed the INR to a new low (reduction in RBI support), while oil prices softened amid renewed U.S. efforts for a Russia–Ukraine peace proposal. In the near term, risks remain skewed toward profit booking, especially if currency weakness persists. The investors are now closely monitoring the upcoming IIP, Q2FY26 GDP data (forecast was 7.3% YoY, released on Friday evening, actual 8.2%) and RBI policy for directional cues.

Bulls vs Bears

Looking ahead, the market narrative is shaped by a mix of optimism and caution. Retail investors have dominated flows throughout the year, yet overall performance fell short of expectations, prompting a shift toward derisking strategies. Liquidity constraints from a heavy IPO calendar (total running at Rs. 1,600 bn in CY2025), and persistent selling by promoters and FIIs have weighed on sentiment, driving allocations toward safer instruments such as gold, fixed deposits, and cash—particularly during this festive and wedding season. Even so, the outlook for 2026 remains constructive, and we expect retail participants to maintain a buy-on-dip stance, supported by prospects of earnings upgrades and broader macro stability.

Gold remains a critical hedge amid geopolitical uncertainties and uneven global recovery. While near-term volatility persists due to mixed Fed signals, structural demand drivers—such as robust central bank buying, record ETF inflows, and resilient India–China consumption—provide long-term support.

In India, seasonal demand during the October–March wedding period, accounting for nearly half of annual jewellery sales, continues to underpin momentum. Organised jewellers will benefit from premiumization trends and festive tailwinds, ensuring margin stability. Jewellery stocks, therefore, remain attractive in the medium term, even as short-term performance may fluctuate with international gold price movements.

On the equity front, Q2 results have largely met expectations, with midcaps outperforming by doubling the broad market growth rate, which was mixed at ~10%. Earnings upgrades are anticipated from Q3 onwards, driven by tax reforms, favourable monsoon conditions, moderated inflation, and accommodative monetary policy. This optimism extends into 2026, as global and domestic risks are expected to moderate, aided by progress on trade deals and geopolitical stability.

Santa Claus rally ahead?

Seasonal factors also play a role in the near-term. The Santa Claus rally, historically associated with December, is likely to reinforce positive sentiment, fuelled by festive optimism, institutional window dressing, and consumer spending linked to annual bonuses.

It looks like the Santa rally has come early in expectations of peace initiatives, easing trade tensions, and potential rate cuts by the RBI and Fed. While bouts of volatility and profit booking may persist in the short term, the medium-term outlook remains positive. Overall, 2026 is shaping up to be a year of recovery and growth for Indian equities.

Currently, the Indian equity market is experiencing controlled volatility, balancing short-term challenges from uncertainties surrounding trade and peace talks with a constructive long-term outlook toward a better 2026.

(Vinod Nair is Head of Research, Geojit Investments Ltd)

Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.