Equity Monthly for January 2026

Indian markets remained range-bound in 2025, defined by a "tug of war" between robust domestic inflows (~ + INR 5 Lakh Crore) and persistent FPI outflows (~ - INR 1.6 Lakh Crore). Despite positive large-cap returns, stock-level performance was highly divergent; only 43.2% of BSE 500 stocks recorded gains. Large-caps outperformed mid and small-caps due to valuation comfort.

Table 1: Return Distribution of BSE 500 Stocks for the Year 2025

Source: Ace Equity; Absolute 1-Year Return as of 31-Dec-2025.
Past performance may or may not be sustained in the future.

Table 2: Total Returns of Major Indices

Source: Bloomberg. Data as of 31-Dec-2025.
Past performance may or may not be sustained in the future.

Benign earnings print over the past few quarters and absence of a trade deal with the U.S. kept the markets under check. Policy actions were triggered to boost consumption in the economy. Benign inflation enabled the central bank to ease policy rates during the year. GST structure was rationalized from four main slabs to two, along with reduction in rates for most sectors.

The Road Ahead

Market direction will now be shaped by the trajectory of earnings and flows.

Can Earnings growth pickup?

The easy earnings base of 2025 sets the stage for a recovery. Two large segments of indices – Financials & IT sector could drive earnings growth during the year. Rate cuts during the year posed pressure on interest margins for banks during the year. As most of the interest rate cuts are passed on to deposit rates, this can turn out to be an earnings tailwind in the current year. Certain segments within financials like insurance companies witnessed transient issues in the current year which can normalize going forward. A shift in technology spending pattern of global enterprises from hardware to software applications along with improving adoption of new technologies can be trigger for revival in client spending of IT service players. Policy actions to improve disposable income in the hands of consumers could also support consumption in the medium term.

Would FPIs (Foreign Portfolio Investors) return in 2026?

If we consider the aggregate market cap of BSE 500 stocks, FPIs hold 18.3% of the stock, a tad lower than the DII shareholding at 18.9% (Source: Ace Equity; Sep-2025 shareholding is considered; Market Cap as of 30-Dec-2025). Compared to prior year, Valuation of domestic indices relative to global indices have become more palatable. Spread in valuation of Nifty 50 compared to global indices such as MSCI EM & S&P 500 indices, is lower than historical average, which points to relative attractiveness on valuation front. While relative valuation is attractive, a sustained FPI return remains sensitive to currency exchange rates.

Are current valuations cheap enough to trigger a rally?

As shown in the table below, index valuations haven’t materially changed over the recent year. Valuations near long term average along with potential for earnings revival points to a healthy combination for reasonable return potential.

Table 3: Valuation of Major Indices

Source: Bloomberg. Data as of 31-Dec-2025 ; P/E: Price to Earnings; P/B: Price to Book

What can investors consider doing?

Muted recent returns and divergent stock performance have created "bottom-up" opportunities during the year. Our bottom-up portfolios are seeing relatively better upside compared to prior year. Though current levels may restrict "super-normal" gains, they offer a healthy entry point for long-term investors to make fresh allocations.

Above article is authored by Quantum.

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