Large Caps Set to Shine as Earnings Drive 2026-27 Markets

Large-cap stocks are expected to attract significant investor interest in the 2026-27 period, according to Pratik Gupta of Kotak Institutional Equities. This shift comes as market focus moves from liquidity-driven rallies to earnings performance, with large-caps presenting compelling valuations and facing reduced foreign investor selling.

While recent quarterly results showed improved earnings growth, margin pressures persist in sectors like autos and consumer discretionary. Financials and metals are viewed positively due to attractive valuations and a favorable commodity environment. Conversely, IT services face uncertainty amid evolving AI spending patterns.

The impact of Artificial Intelligence (AI) presents both challenges and opportunities for India, potentially disrupting traditional IT services but creating growth in areas like data centers and cloud infrastructure.

For 2026-27, the market is anticipated to become more earnings-driven, favoring quality large-caps and select mid-caps, with a wider dispersion between company performances. This contrasts with the liquidity-driven environment of 2023-25.

External risks, particularly elevated crude oil prices due to geopolitical tensions, remain a concern for India's balance of payments. While capital account measures provide some buffer, they do not fully mitigate the sensitivity to oil price fluctuations. The USD-INR is expected to trade within a range of 93-96.5 for FY27.

There is a possibility of interest rate hikes due to inflationary risks and declining real rates, with a 50-basis-point cycle potentially beginning from the December policy.

Initial Public Offerings (IPOs) are expected to cause only short-term liquidity drains, with robust domestic liquidity and strong retail appetite, albeit more valuation-conscious. Market drivers will primarily be earnings growth, valuations, and global liquidity.

Company-specific governance issues and leadership transitions, while causing sentiment volatility, are unlikely to pose systemic risks to the broader market unless they impact business fundamentals or capital allocation.

Climate change is a growing factor, influencing food inflation, insurance costs, and supply chains. Investors are closely monitoring climate-related variables, while also identifying investment opportunities in renewable energy and water infrastructure.