Equity Outlook - September 2026

Indian equities were flat in the month of August, as the West Asia crisis flair up negated the positive sentiment of strong quarterly earnings. Global bond yields hardened during the month, especially in the longer duration segment. The only signal against a US rate hike was the weak jobs report which reduced chances of a near-term Fed hike. The sharp rise in global yields along with dearer commodity prices could trigger the Indian central bank to pursue rate hikes in the medium term. A prolonged period of high global and domestic yields could have a bearing on valuations over the medium term.

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

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

Resilient Earnings amid Rising Input Cost

• Domestic Demand environment remains reasonable as indicated by core segments like auto, cement, real estate, banking. Though we don’t anticipate a sharp slowdown, there is a possibility of volume growth to moderate in auto, as high growth in 2HFY25 would make 2HFY26 growth look modest by comparison. Companies in general would pass on higher input costs in recent times.

• 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.

• Input costs and external pressures remain elevated and are likely to be more pronounced in the near term. Companies would pass on the higher input costs gradually.

Near-Term Drivers We Are Watching

• Durability of the West Asia de-escalation: Crude remains a key 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.

• 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 and can translate to stronger flows.

Table 2: Current Vs Historic Valuations of major indices

Source: Bloomberg; P/E: Price to Earnings; P/B: Price to Book; Data as of 31^st Aug 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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