Equity Outlook - August 2026

Indian equities were flat in the month of July, as the West Asia crisis re-escalated. Flair up in the West Asia conflict resulted in crude touching $100/barrel before moderating towards the end of the month. The inflation impact due to these factors would weigh in RBI’s monetary policy going forward. The earnings print for corporates is resilient in 1st Quarter of FY2027.

Table 1: Performance of Major Indices during the Month (CAGR Returns)

Source: Bloomberg, Data as of 31st July 2026.
Past performance may or may not be sustained in the future.

Resilient Earnings amid Rising Input Cost

• Broad-based growth, with margins largely intact: Revenue and profit growth across corporate India accelerated versus recent quarters, and operating margins are largely stable. We anticipate real impact of West Asia crisis on input cost will be visible in the coming quarters as companies run out of stocked inventories.

• Auto companies: benefited from GST relief announced last year and this has aided with domestic volumes. Exports across Emerging Markets have been strong; coming from a low base. Incrementally input cost increase will impact margin in the sector.

• Bank: loan growth remained healthy, but net interest margins came under pressure as cost of deposits remained high in the system, especially wholesale deposits. After a slow start FCNR deposits have gained pace; which may offer cost of deposit advantage. Credit growth has picked up pace driven by corporate loans.

• IT Services: Companies navigated a cautious global spending environment, choosing to protect profitability over low-margin revenues. Deal pipelines and AI-led engagements continued to build steadily throughout the quarter. Discretionary demand remains weak across geographies.

• Consumer/FMCG: showed early signs of a recovery in demand. The tax rationalization implemented late last year appears to be filtering through to volumes a few quarters later, with "growth" categories outpacing core categories. Companies stayed watchful on food-input inflation (tea, salt, edible oils) and the potential impact of a weak monsoon on rural demand.

• Pharmaceuticals: Companies with meaningful US export exposure faced earnings pressure as a major high-margin generic drug normalized. Sales fell sharply as competition intensified and its limited-competition exclusivity window faded. On the positive side, companies have re-invested this earlier windfall into steadier, higher-margin assets. Separately, the US government proposed higher tariffs on generic drugs, effective two years hence, which if implemented would significantly raise US generic drug end-prices. That said, generics are essential, price-sensitive medicines with limited substitutes, and any tariff cost is likely to be shared across the value chain rather than borne by suppliers alone.

Near-Term Drivers We Are Watching

• Durability of the West Asia de-escalation: Crude remains the single biggest swing factor for India’s growth and inflation. A durable solution to the crisis is critical for the growth trajectory.

• Earnings and input costs: Forward FY27E EPS growth is likely to see moderation due to limited pass-through of crisis-driven input cost escalation, largely in cement, autos, capital goods and chemicals. Market is likely to overlook the near-term earnings impact as a durable solution to west Asia crisis would moderate input prices over medium term.

• Monsoon: After two good rural years, the progress and spread of this year’s monsoon will be keenly watched. A weak monsoon would have a bearing on rural income and inflation.

• FPI trajectory: Foreign interest hinges on India’s relative EPS growth, currency stability and US yields; As AI related foreign stocks see a growth moderation, India’s earnings growth would appear reasonable in a global context.

Table 2: Current Vs Historic Valuations of major indices

Source: Bloomberg; P/E: Price to Earnings; P/B: Price to Book; Data as of 31st July 2026
Past performance may or may not be sustained in the future.

What Can an Investor Do?

Although the near-term earnings trend is tied to global developments, valuations have become conducive in several pockets - large-caps in particular trade below their long-term averages. Near-term volatility is likely to persist as the geopolitical situation evolves, but the impact of short-term disruptions on the intrinsic value of businesses is limited. Investors may consider a staggered allocation to equities to take advantage of favorable valuations and benefit from the potential volatility.

Above article is authored by Quantum.

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