Indian equity markets are heading into 2026 after a year that tested investor patience but also laid the groundwork for healthier long-term returns. According to the 2026 outlook report by Motilal Oswal Financial Services, the consolidation seen in 2025 has reset expectations, valuations, and market leadership, creating conditions for more sustainable growth in the year ahead.

Calendar year 2025 proved to be a period of recalibration for Indian equities. After touching record highs in September 2024, benchmark indices entered correction territory, driven by global trade tensions, persistent foreign institutional investor (FII) outflows, currency volatility, and geopolitical uncertainty. Although domestic macro fundamentals remained relatively stable, earnings growth moderated in several pockets of the market, particularly among smaller companies that had previously seen sharp valuation expansion.

By December 24, benchmark indices were marginally lower on the day, with the Sensex closing at 85,408.70 and the Nifty 50 at 26,139.70. Despite these short-term fluctuations, the Nifty ended 2025 with a year-to-date gain of around 10 percent, reflecting resilience amid global headwinds.

Motilal Oswal believes the character of the market is set to change in 2026. Unlike the liquidity- and multiple-driven rallies of recent years, the brokerage expects the next phase to be led by a recovery in corporate earnings and a gradual revival in private sector capital expenditure. Government policy measures already announced, along with those expected in the upcoming Union Budget 2026, are seen as key enablers of this transition.

The brokerage highlights that India is entering 2026 with indices trading close to all-time highs, but without the excesses typically associated with late-cycle market peaks. The consolidation of 2025 has moderated expectations and brought a degree of valuation discipline, particularly in large-cap stocks.

For investors, this outlook suggests a shift away from momentum-led strategies towards a more fundamentals-driven approach. Motilal Oswal notes that India’s long-term structural growth story remains intact, supported by favourable demographics, increasing digital adoption, rising financialisation of household savings, and continued reform momentum. These factors provide a durable base for earnings growth, even as global conditions remain uncertain.

An important external variable flagged by the brokerage is the ongoing tariff-related friction between India and the United States. Any resolution on this front could act as a meaningful catalyst, improving export visibility and overall market sentiment.

From a valuation standpoint, Motilal Oswal draws a clear distinction between large-cap stocks and the broader market. The Nifty-50 is currently trading at a one-year forward price-to-earnings multiple of 21.5x, around 4 percent above its long-period average. In contrast, valuations in mid-cap and small-cap indices remain significantly elevated, with premiums of roughly 26 percent and 50 percent, respectively, over their historical averages.

This divergence underpins the brokerage’s preference for a selective approach outside large caps. While opportunities remain in the broader market, Motilal Oswal stresses the importance of focusing on companies with strong balance sheets, sustainable cash flows, and clear earnings visibility.

In terms of sectoral positioning, Motilal Oswal maintains a positive bias towards large-cap stocks where earnings growth and valuations are better aligned. Financials continue to be a preferred segment, supported by healthy credit growth, improving return ratios, and robust balance sheets.

The brokerage is also constructive on consumption-linked sectors such as consumer discretionary and automobiles, where demand recovery is gradually broadening. Industrials and capital goods are seen as well placed to benefit from government-led reforms, infrastructure spending, and localisation initiatives across manufacturing, electronics, data centres, and energy transition-related segments.

On technology, Motilal Oswal takes a medium-term positive view on IT services, citing expectations of a gradual recovery in global technology spending. Stabilising macro conditions, combined with increased focus on digital transformation, artificial intelligence, and efficiency-led adoption, are expected to support the sector’s earnings outlook.