If global markets were running a marathon this year, Indian equities were clearly trailing the pack. While South Korea saw Kospi skyrocketed nearly 76%, Japan’s Nikkei soared over 25%, and Hong Kong’s Hang Seng climbed more than 30%, China’s Shanghai Composite posted gains of over 16%. In the west, Wall Street also bagged doubled digit gains with tech heavy Nasdaq up 21%, S&P 500 rising 17.5%, and the Dow Jones advancing over 14%. Indian benchmark indices, Nifty50 and BSE Sensex, however, struggled to keep pace. Against these strong gains in global markets, India’s benchmarks posted more modest returns, with the Nifty 50 rising over 10% and the Sensex ending the year 8.55% higher. On December 31, the Sensex closed at 85,220.60, up 545.52 points, while the NSE’s Nifty 50 finished in the green at 26,129, gaining 190 points.Despite the Nifty 50 and Sensex recently touching record highs, broader market sentiment remained muted, with nearly half of the NSE’s top 500 stocks still trading below the benchmark. Though the indices ended 2025 in green, the relative underperformance has left investors struggling with two key questions as the calendar turns: Why did Dalal Street remain muted in 2025? And importantly, what’s the outlook for Nifty50 and Sensex in 2026?
So, what dragged Indian benchmarks down?
According to experts that TOI spoke to, the stock market was dragged down by a combination of factors, both internal and external. Factors like US-India trade deal delay, not participating in the AI race, muted corporate earnings, and FII selling weighed the market down.Earnings slowdownMuted corporate earnings emerged as one of the major reasons behind the stock market’s underperformance. VK Vijayakumar, chief investment strategist at Geojit Investments, told TOI that “during the last six quarters, earnings growth has been in single digits. In the long run, the market is a slave of earnings.” So the drag down was, ultimately, the market’s response to weak earnings.Despite the benchmarks trading near lifetime highs, the overall market appeared weak, weighed down by the deceleration in earnings momentum since the June 2024 quarter, following a robust 18% CAGR during FY20–FY25, said Sunny Agrawal, head of fundamental research at SBI Securities. Sharp divergenceAccording to Ankit Soni, associate vice president – fundamental research at Mirae Asset Sharekhan, market returns over the last one-and-a-half years remained largely single-digit, with a stark gap across segments.“Large-cap indices delivered around single-digit returns, while mid and small caps underperformed by nearly 10%,” he said, highlighting the high variability in returns and sustained weakness in the broader market. Agrawal also noted that “despite benchmark indices trading close to lifetime highs, the broader market continued to trade on weaker footing.”FII sellingMarkets hit new highs towards the end of the year, but failed to hold those levels. Soni pointed out that “there is always a pullback of around 2–4% from the 52-week highs,” largely due to foreign institutional investor (FII) selling. Agrawal added that persistent selling by Foreign Portfolio Investors (FPI), promoters and PE firms, despite strong domestic liquidity enabling smooth exits, weighed heavily on sentiment.According to Nikhil Khandelwal, managing director at Systematix Group, uncertainty around global interest-rate trajectories, currency volatility and geopolitical tensions led to intermittent foreign portfolio outflows.Valuation concerns versus global peersSeveral experts flagged stretched valuations as a key deterrent for foreign investors. Sunny Agrawal said Indian markets looked relatively expensive compared to other emerging markets, prompting capital outflows. Siddarth Bhamre, head of institutional research at Asit C Mehta Investment Intermediates Limited said that while Indian markets delivered higher single-digit returns, the valuation premium made the underperformance stark when compared with global equities and other asset classes.Missing the AI rallyOne of the defining features of global markets in 2025 was the AI-led rally, which India largely missed. Vijayakumar described India as an “AI loser” in a year when “AI winners like the US, China, Taiwan and South Korea gained substantially.” The lack of a pure-play AI story reduced India’s attractiveness for global fund managers, Agrawal pointed out.Currency volatilityRupee instability emerged as another headwind, as the currency is hovering around 90 per US dollar levels. Vijayakumar explained that FII selling weakened the rupee, which in turn triggered further FPI outflows, creating a negative feedback loop. This year the currency has fallen over 5%, depreciating past the 91 per US dollar mark, before recovering to 89. Tariff tensions and geopolitical risksFears linked to geopolitical tensions combined with US President Donald Trump’s imposition of trade tariffs worsened the sentiment and disrupted global business dynamics.India’s export competitiveness also came under strain. Khandelwal pointed out that India became “one of the most tariffed countries by the US under the new tariff regime,” impacting export-oriented industries. Ankit Soni further cited the non-closure of key trade deals as one of the factors preventing markets from sustaining rallies.The United States imposed a total of 50% tariffs on India – with a 25% tariff on Indian imports for purchases of Russian oil. Muted domestic capex and policy-related concernsDomestically, muted government capital expenditure added to the pressure, particularly in sectors dependent on public spending, according to Nikhil Khandelwal. Policy changes such as an increase in capital gains tax also dented investor sentiment during the year, Agrawal flagged.“Valuations have turned comfortable for Nifty50, which is trading at a 1-year forward P/E multiple of 19-20x vs 22x-23x during the last peak in Sept’24. During the last 14 months, there has been notable compression in the valuation premium of Nifty50 over MSCI EM index from 80% in September 2024 to 47% in December 2025, which is below the 10 year average of 57%. Barring few pockets, valuations have turned comfortable across mid and small caps,” Agrawal told TOI.Now that we know why Dalal Street’s performance was muted in 2025, it is time to dive into how the stock market is likely to perform in 2026. The answer depends on many factors including FII performance, earnings, balance sheets and much more!
What about next year — Will Dalal Street stand stronger in 2026?
A short answer to if the Indian stock market is expected to perform better than their global peers in 2026 would be, Yes. Here’s why:Just a consolidation phaseSoni told TOI that the stock markets gave a strong rally from 2022 to 2025 and hence this subdued momentum was just a pause.“A good set of rallies we have seen, so there is always a gap of one year or two with respect to your continuation of the rally, and this we feel is good for the market to consolidate for some time and then give us a good set of rallies,” he added.”India has structural growth driversAs compared to other markets, India remains “relatively well placed” supported by key growth drivers such as strong domestic demand and improving balance sheets. “While global markets will continue to influence sentiment, India’s long-term fundamentals remain supportive,” Nikhil told TOI.Reversal of fundsAgrawal also placed India among emerging markets like Brazil and China, supported by reversal of funds from “safe haven US Bonds towards riskier assets like EMs and commodities.”Meanwhile, Vijayakumar said that while India is expected to perform better than it did in 2025, it would be tough to say if it will be able to outperform its global peers.
Will FIIs come back?
In 2025, FIIs turned net sellers, withdrawing Rs 1,04,050 crore from India throughout the year. Funds from FIIs are expected to return in 2026, reversing their current position as net sellers. These inflows will however, depend on many factors. According to Bhamre, declining Rupee against US dollar has fueled the possibility that FIIs will be returning in the upcoming year, as “not an expensive market and depreciated currency is an ideal setup for foreigners.”The expert further added that besides the case of heavy buying, “they won’t be bigger sellers in 2026 of Indian equities.” Soni believes that a strong monsoon and a favourable kharif season, along with other positive factors, could encourage FIIs to return to the country.“FIIs won’t be able to neglect the Indian market for long,“ he said, adding that they will be back given RBI initiatives with respect to the open market operations, a better Kharif season and a good earnings report. He further added that FII inflows are expected after the H2 earnings report. “We could get stabilized FII inflows maybe in financial year 2027”Meanwhile, Nikhil told TOI that FII flows are expected to remain volatile and largely data-driven, shaped by global interest rate movements and currency trends. However, he said consistent domestic inflows through SIPs, along with long-term investments from global private equity and strategic investors, should act as a strong cushion, lowering India’s dependence on FPI flows compared with previous cycles.
Stock market in 2026 — What will support Dalal Street?
Domestic factors2025 was a year of policy changes with GST reforms, income tax changes, interest rate reduction by 125 bps and more. The effect, however, will be visible in the upcoming year, 2026, Bhamre said. On the internal side, “consumption trends and credit growth will be closely watched,” Khandelwal said, adding “While global developments will continue to shape short-term sentiment, domestic fundamentals are likely to play a larger role in determining market direction.”Better corporate profileOne of the major internal factors to push stock markets higher is the growth in corporate earnings. “Indian corporates in the long term are likely to deliver earnings growth in line with the nominal GDP growth of 10-11% and the same should get reflected in the performance of benchmark indices,” Agrawal said. Simultaneously, “sustained improvement in profitability, margins, and cash flows will drive confidence,” Nikhil told TOI.Vijaykumar added that the rally might be further helped by weakening artificial intelligence trade.Sectoral revivalAutos, especially commercial and passenger vehicles, along with IT are emerging as critical growth engines. After underperforming for nearly two to three years, the auto sector is now gaining traction and is expected to contribute meaningfully to earnings in 2026, Soni adds. The agriculture sector is also expected to remain upbeat, thanks to a good kharif season and an overall favourable weather.According to Khandelwal, “returns are likely to be in the 10 -12% range, with outperformance coming from more sector specific, asset class specific and company specific investments.”RBI interventionInitiatives by the Reserve Bank of India with respect to the open market operations, controlling inflation and other aspects.Better valuationComfortable valuation for NSE benchmark Nift50, is expected to lift investor sentiments in 2026. Nifty “is trading at 1-year forward P/E multiple of 19-20x vs 22x-23x during the last peak in September 2024, significant compression in valuation premium over MSCI EM index from 80% in Sep’24 to 47% in Dec’25, which is below 10 year average of 57%,” Agrawal noted.US-India trade dealFactors such as delays in concluding the India-US trade deal are also expected to play a major role in deciding the momentum of Dalal Street next year as markets are more favourable towards early closure of the deal.Increased budgetAnother major driver that could boost growth and create a platform for other factors to contribute is government capital expenditure. Announcements of significant capital spending, whether in the upcoming budget or through other channels, could set the momentum for Indian equities, Bhamre said.
Nifty and Sensex targets in 2026
So, where are Nifty and Sensex headed in the coming year and what are the targets. According to experts, Nifty is expected to touch anywhere between 28,500 to 29,800. Sensex, meanwhile, might reach 98,000 levels. Nifty50 began 2025 at 23637.65 while the BSE benchmark began at 77,500. In the bull case scenario, NSE benchmark Nifty is expected to reach 29,800 by the end of 2026 while BSE Sensex is expected at 98,000, Vijaykumar predicted.According to Soni, the NSE benchmark is expected to touch 28,000 in financial year 2027, “and then 28,500 would be a good range of approach going forward”, Soni told TOI. provided the FIIs come back. “Nifty 50 FY27E EPS is likely to be Rs 1280-1300. At upper PE band of 22-23x – Nifty can touch 28,500-30,000 levels and accordingly Sensex should also deliver inline returns,” Agrawal said, adding that from an investor’s perspective, focus will be on the broader market which has been underperforming since the past 12-14 months.“The indices are trading at approx 22-23x PE basis the FY26 estimated EPS of Nifty, which is at the lower end of the past 10 year Nifty multiple of 22-28x,” Systematix executive told TOI.Agrawal suggested traders to not “focus too much on levels of benchmark indices and investors should adopt bottom-up investment strategy.”
Which sectors & stocks to watch in 2026
Large caps remain the preferred safety play:Market experts see large caps as relatively better placed in 2026 due to reasonable valuations, stronger balance sheets and clearer earnings visibility. Vijayakumar told TOI that large caps are fairly valued and remain his preferred segment, while Nikhil noted that companies with balance-sheet strength offer comfort in a volatile environment. According to Bhamre, FIIs are more likely to return to large-cap stocks where valuations remain attractive.Mid caps need selectivity, not blanket exposure:Experts told TOI that mid caps still offer opportunities, but only through careful stock selection. Soni believes cherry-picking in mid caps can deliver returns, while Khandelwal points out that select mid-cap companies with scalable business models and disciplined capital allocation could outperform. However, the consensus remains that 2026 will reward bottom-up investing, not broad-based bets.Divergent views on small-cap valuations:Views on small caps remain mixed. Agrawal said that small-cap valuations have turned more comfortable and could outperform in 2026. In contrast, Vijayakumar and Bhamre remain cautious, flagging continued overvaluation in parts of the segment, especially amid heavy retail inflows through mutual funds, which could amplify downside risks if liquidity tightens.Retail-driven liquidity a key risk factor:The surge in retail money into mid- and small-cap stocks has led to valuation excesses, warns Bhamre, who says any reversal in liquidity could cause sharp corrections. This risk underpins the broader market view that stability will be concentrated in large caps, while volatility remains higher in smaller stocks.Portfolio strategyReflecting the cautious optimism for 2026, Bhamre suggested a large-cap dominated portfolio with “with some room for high growth not richly valued mid and small cap” proposing an allocation of around 70% large caps, 20% mid caps and 10% small caps.
Sectors likely to stand out in 2026
Metals: The metal sector is expected to deliver healthy returns, as valuations remain favourable when viewed over a longer horizon. While the sector is currently trading above its five-year average valuation, it is still well below the 10-year average. “So, we see a good set of values in the metal sectors out there,” Soni told TOI.PSU Banks: Public sector banks also continue to offer value, supported by relatively attractive valuations and improved balance sheets. “There is also good value in PSU Banks this year, as valuations remain at around 8–9x multiples…The last five years’ valuation is around 5%–10%, 11%–12%, which is currently at 8%–9%. So, we see a good value buying opportunity in PSU Banks.” IT: Soni said the IT sector is trading close to its long-term averages, creating a potential entry point for investors. “The IT sector itself is currently trading at a five-year average multiple of around 28, which is a five-year average multiple of 30X. So this could just provide you a good opportunity to invest into the IT sector; that sector is basically considered to be cheaper in relation to your stabilizing global macro environment,” he told TOI.Other industries like auto, auto ancillary, telecom, NBFCs, banks, AMCs, wealth managers, metals & mining, PEB, new age businesses, hotels, jewellery, liquor, dairy products, railway wagons, OMC, IT and Pharma-CDMO are also expected to outperform in 2026.
Risks for Dalal Street — factors that could hamper performance
Small caps at riskAn escalation in stress across the retail and MSME segments could lead to higher delinquencies, triggering market corrections, particularly in mid- and small-cap stocks, warned Bhamre, adding that a worst-case scenario would be rising NPAs in the NBFC space, which could dent consumption and create spillover risks across sectors.AI bubble shockA potential burst of the AI-driven tech bubble in the US is one of the biggest known risks for 2026, said Vijayakumar. While healthy corrections are desirable, a bubble burst could trigger sharp global market sell-offs. Vijayakumar also flags risks from a slowdown in India’s growth momentum and prolonged delays in a US–India trade deal.External macro risks could weigh on sentimentGlobal headwinds such as a sharper-than-expected slowdown in growth, renewed inflationary pressures and prolonged currency volatility could impact risk appetite, according to Khandelwal. Domestic factorsOn the domestic front, he cautioned that muted government capital expenditure and earnings disappointment in high-valuation pockets, such as the recent sell-off in EMS stocks, remain key concerns.Weak corporate profileMarkets are becoming increasingly unforgiving of weak execution, especially in over-owned themes where expectations are already stretched, Khandelwal noted. Companies that fail to deliver on earnings quality or governance could continue to underperform, reinforcing the need for disciplined stock selection.The absence of earnings upgrades could trigger meaningful market downside.Liquidity, crude oil and trade deficit risks loomA reduction in domestic liquidity support, a spike in crude oil prices due to geopolitical tensions, and a widening trade deficit could all act as pressure points for markets next year, said Agrawal.As the new year 2026 is knocking on the door, stakes are high for the stock market as investors look to bag bigger returns as compared to 2025. Traders need to watch out for internal and external components before making any investment decisions.(Disclaimer: Recommendations and views on the stock market, other asset classes or personal finance management tips given by experts are their own. These opinions do not represent the views of The Times of India)
