Indian Markets Eye Fundamentals: Valuation Concerns Linger for Broader Stocks

In a significant shift, investment strategist Vikas Gupta of OmniScience Capital asserts that Indian equity market have finally moved past the 'war and peace' narrative, with investor focus now squarely on core company fundamentals. While he sees potential for higher earnings growth in broader markets like mid and small caps, Gupta cautions that their current stretched valuations might prevent them from outperforming large-cap stocks over a 3-5 year period. This perspective comes as India's economy shows resilient growth, with corporate earnings projected for a healthy 15% compound annual growth rate from FY26-FY28, though some analysts, like Goldman Sachs, recently revised down their 2026 earnings growth forecast for the MSCI India index to around 10-12%. Large-cap stocks are generally seen as trading at fair valuations, while mid-cap and small-cap segments, despite some recent corrections, still command a significant premium over their historical averages. Geopolitical events, while previously causing volatility, are increasingly being 'digested' by the market, with domestic factors gaining prominence. Investors should closely watch corporate earnings reports and any shifts in valuation premiums, particularly in the mid and small-cap segments. Recent strong inflows from Foreign Portfolio Investors (FPIs) into Indian financials, partly due to easing West Asia conflict concerns and attractive valuations, indicate a selective approach. The long-term performance will heavily depend on whether earnings delivery can justify existing price multiples, making disciplined investing and a focus on intrinsic value crucial in the coming quarters.