Year- Ender 2025: Equities Deliver Modest Gains – What to Expect in 2026

Indian equities delivered only moderate gains in 2025, with Nifty50 rising ~9.4% per cent, mid-caps gaining 5.4 per cent, and small-caps falling 5.7 per cent. This is a sharp contrast to the previous years, considering the robust returns provided by the benchmark as well as broader indices in those years. In 2023 the Nifty50 surged 18 per cent, while the Nifty Midcap 100 climbed more than 40 per cent and the Nifty Smallcap 100 jumped 55 per cent. The momentum continued in 2024, with Nifty50 14 per cent, mid-caps up 23.9 per cent and small-caps nearly 23.90 per cent.

Analysts attribute the muted performance in 2025 to a combination of factors such as stretched valuations, foreign fund outflows and global uncertainties, including punitive tariffs on India by the US.

FII Withdrawal

In 2025, foreign institutional investors sold almost Rs. 1.98 lakh crore worth of Indian stocks. Being one of the highest yearly outflows in recent years, the withdrawal was due to a number of factors such as high valuations, uncertainties throughout the world, and the U.S. Federal Reserve's position on interest rates. The price-to-earnings ratio (P/E ratio) for Indian stocks had been at 22-24 during the year, which is higher compared to the historical average of 17. This reflects how much the stocks seemed expensive for investors. Morgan Stanley analysts said that FIIs pulled back because of changes in global allocation and high valuations.

Heavy IPO issuance absorbed investor capital that might otherwise have supported secondary-market liquidity, leaving fewer buyers for existing stocks. Sectoral outflows were significant, with FIIs selling heavily in financials, IT, and consumer stocks. Mid-cap and small-cap indices corrected sharply as Choice Wealth's Akshat Garg describes 2025 as a "stock-picker's market", where broad indices underperformed but disciplined portfolios did better.

Domestic earnings and liquidity

Corporate earnings growth slowed down in a number of important sectors during the course of the year. This was due to both margin pressures and a drop in consumer demand. Higher input costs and less cash on hand hurt profits, and families became more careful with how they spent their money. Discretionary categories showed the most weakness in domestic spending, as demand fell off through the middle of the year. However, the introduction of GST reforms in September has improved things as it made it easier for businesses to pay their taxes and enhancing their cash flow. This change in policy helped calm the sentiments, and by the end of the year, there were early signs of recovery in retail and manufacturing activity.

Tariffs and shocks from outside

External shocks, like the US's 50% tariff on Indian goods, which includes a 25% punitive tariff on India's Russian oil imports, have hurt Indian stocks a lot. The tariffs put export-orientated sectors such as textiles, gems and jewellery, leather, and certain engineering and chemical items in heavy trouble, as the products of these sectors became less competitive in the US market with heavy prices due to the high tariffs. It is estimated that exports ranging from about 48 billion dollars to as much as 87 billion dollars have been affected by this. Rising U.S. yields and a stronger dollar made developed-market assets more attractive, while rupee depreciation reduced dollar-adjusted returns for foreign investors.

How the Factors Interacted

None of these reasons worked in isolation. Foreign selling reduced liquidity, which magnified valuation concerns. Tariffs and geopolitical shocks worsened sentiment and raised hedging costs. A weakened rupee reduced dollar-adjusted returns for foreigners and encouraged further outflows. Together they turned what had been a two-year rally into a period of consolidation, leaving investors cautious but setting the stage for a more balanced recovery in 2026.

Stocks May Recover

Brokerages are increasingly hopeful about 2026. They think that stocks will do better than other types of investments like gold, silver, and real estate because of their fair value, rising domestic demand, changes in fiscal and monetary policy, and so on. Changes in 2025, such as reforming the GST and the RBI's aggressive rate cuts, are likely to make the stock market seem better in 2026. GST 2.0 made slabs easier to understand and decreased taxes on basic goods, cars, and agricultural inputs to encourage spending. At the same time, the Reserve Bank of India lowered the repo rate by a total of 125 basis points to 5.25 per cent, which made borrowing cheaper and helped the economy thrive.

Valuations have eased after the consolidation of 2025, making stocks look more attractive. Axis Securities expects domestic demand, government infrastructure spending, and corporate earnings to drive growth, with banking, capital goods, defence, railways, pharmaceuticals, and consumption leading the way.

Nuvama highlighted the Reserve Bank of India's upgraded GDP outlook of 7.3 per cent for 2026 as a key support for profits. Global brokerages are also bullish. Morgan Stanley has set a bull-case target of 107,000 for the Sensex by December 2026, with a base case of 95,000. HSBC projects the Sensex at 94,000 by year-end, about 10 per cent higher than current levels. A poll of 13 brokerages conducted by ET Markets showed consensus that the Sensex will cross 90,000 in 2026.