Indian equity markets have delivered robust returns over recent years, supported by a post-pandemic economic recovery, banking sector clean-up, and sustained government capital expenditure. However, 2025 marked a phase where macroeconomic data improved faster than market performance, creating a divergence that puzzled investors. Addressing this gap, Neelesh Surana, CIO at Mirae Asset Mutual Fund, laid out a cautious but constructive outlook for equities at the fund house’s Market Outlook 2026 event.

Surana’s central message was clear: predicting equity markets over short horizons remains inherently challenging, even when macro conditions appear favourable. Markets, he stressed, are influenced not by a single factor but by a complex interaction of economic growth, earnings, capital flows, and the cost of capital.

According to Surana, India’s macroeconomic environment strengthened meaningfully through 2025. GDP growth surprised on the upside, with the last two quarters clocking around 7.5 percent growth and expectations of similar or marginally higher momentum in the coming year, exceeding earlier RBI estimates. Inflation undershot expectations, creating room for monetary easing. As a result, interest rates declined, translating into an estimated 125 basis point reduction in the nominal cost of capital.

Yet, despite these supportive fundamentals, equity markets did not fully reflect the macro improvement. Surana attributed this to two key factors: a temporary slowdown in corporate earnings and persistent foreign institutional investor selling. Global capital flows, particularly into AI-linked stocks in other emerging markets, distorted comparative returns and amplified underperformance in markets like India that have limited exposure to those themes.

The correction, he noted, was uneven. While headline indices such as the Nifty were relatively resilient, the pressure was far more pronounced across the NSE 500 universe, especially mid-cap and select small-cap stocks, where valuations had earlier run ahead of earnings.

For investors, the disconnect between economic strength and market performance highlights the limits of macro-driven optimism in the short term. Surana emphasised that equity returns are ultimately anchored to earnings delivery and capital flows, both of which can lag economic indicators. The recent phase underscores why near-term market calls, even over six to twelve months, remain uncertain despite a strong underlying economy.

On earnings, Surana described the past year as a consolidation phase following a strong multi-year recovery led by large banks. Looking ahead, he expects the earnings growth trajectory to revert to the low-teens, suggesting a gradual normalisation rather than an abrupt acceleration.

Policy support remains a key pillar of the constructive medium-term view. Surana pointed to the Reserve Bank of India’s recent rate cuts, liquidity management measures, and regulatory adjustments as supportive for growth. On the fiscal side, government actions such as income tax relief, GST reforms, state-level cash transfers, and sustained public capital expenditure have helped stabilise demand and reinforce confidence.

These measures, combined with an apparent policy preference for supporting growth while managing inflation risks, signal continuity rather than disruption.

Looking beyond cyclical fluctuations, Surana reiterated confidence in India’s structural growth story. Rising per capita income, a young demographic profile with a median age of 28, and the addition of nearly one crore jobs annually over the next decade form the backbone of this optimism. He argued that India’s growth engine will increasingly be driven by consumption and investment rather than exports.

On trade risks, Surana downplayed the direct impact of tariffs on India’s overall growth, noting that net exports account for only about 1 percent of GDP. However, he flagged specific vulnerabilities. Labour-intensive sectors such as textiles, seafood exports, and gems and jewellery remain sensitive to tariff shocks, where even a 10 percent duty could materially strain business viability and employment, creating potential second-order effects.

Structural trends such as urbanisation, nuclearisation of families, digital penetration, formalisation of the economy, and the expansion of the gig workforce were highlighted as reinforcing long-term consumption demand.

From a market perspective, the outlook suggests a phase of selective opportunities rather than broad-based rallies. Large caps may continue to display relative resilience, while earnings visibility and balance sheet strength will be critical differentiators in the mid- and small-cap space. Volatility driven by global flows is likely to persist, even as domestic fundamentals improve.