The Indian stock market has started the New Year 2026 with a bang! The benchmark Nifty 50 is at an all-time high, and so are major sectoral indices, such as the Nifty Bank, Auto, and Metal indices.
The mid-cap index (Nifty Midcap 100), too, is at a record high, showing that investors’ interest is not confined to only large caps.
The Nifty 50 extended gains to the third consecutive session on Friday, 2 January, ending at a record closing high of 26,328.55 after hitting an all-time high of 26,338.90 during the session. Over the last three days, the index has risen by 1.5%, while on the weekly scale, it has climbed by 1.10%, extending gains to the second consecutive week.
These eye-pleasing facts can easily strengthen the belief that the worst for the stock market may be behind us, and that the domestic market is ripe for a runaway rally in 2026 after the modest performance of 2025.
Kya lagta hai?
For many, the Indian stock market is poised for a healthy show in 2026. They believe corporate profitability will improve significantly this year because of policy tailwinds, increased government capital expenditure, strong consumption after income tax and GST reforms, low inflation and healthy GDP growth.
However, the cumulative positive effect of all these tailwinds can be offset by two major risks- the lingering India-US trade deal and earnings disappointment.
“A big risk that I can see is that quarterly earnings fail to improve, which is unlikely, but still we need to be watchful. Also, on the other side, if trade deal delays or remain at the same levels without any development, then it may drag the sentiment of the market. These are the two major risks,” Shrikant Chouhan, the head of equity research at Kotak Securities, noted.
Ajit Mishra, SVP of Research at Religare Broking, too, believes that earnings are the most important factor to monitor.
“If earnings fail to deliver, other positives won’t matter as much. Despite supportive domestic macro conditions, we are still not seeing a decisive trend unfold, and India is underperforming some emerging and developed markets. This makes earnings delivery crucial,” said Mishra.
On the domestic front, a key challenge could be on the spending side. Given the significant capex already undertaken by the government, it may be difficult to expand further while maintaining fiscal prudence.
This makes private capex critical to support growth. If private investment fails to pick up as expected, growth momentum could weaken.
US tariffs remain a major headache for investors. Despite several rounds of talks, there is no concrete development on the trade deal front between the two countries.
G Chokkalingam, founder and head of research at Equinomics Research Private Limited, fears that if tariffs escalate and begin to affect the services sector as well, the rupee could remain weak. In that scenario, foreign investors may continue selling in the listed space.
“FIIs typically sell listed equities with a short- to medium-term view, while unlisted investments are more long-term in nature-beyond one year. If US tariffs intensify, leading to a weaker rupee, we could see foreign investors remain net sellers in listed equities for a third consecutive year,” said Chokkalingam.
Valuations comfortable?
No, say experts. The Indian stock market is still witnessing a growth-valuation mismatch.
According to brokerage firm Motilal Oswal Financial Services, the Nifty 50 now trades at a 12-month forward P/E of 21.2 times, which is near its long-period average (LPA) of 20.8 times (2% premium). However, the P/B ratio at 3.2 times is an 11% premium to its historical average of 2.9 times.
Moreover, the brokerage firm highlighted that the market capitalisation-to-GDP ratio now stands at 133% of FY26E GDP, which is well above its long-term average of 87%.
What top investors, experts say
Towards the end of the last year, Mint spoke to several top investors and experts for their insights on the stock market’s return potential in 2026. Most of them expressed optimism and expected a decent double-digit growth, but cautioned that the market may not see a broad and runaway rally in 2026.
Ace investor Shankar Sharma highlighted that India’s growth slowdown is unlikely to reverse quickly, and weak growth in tax receipts remains the core issue.
“Markets could see a mid-cycle rally, and I sincerely hope they do, but I do not expect a strong economic revival anytime soon,” said Sharma.
Nilesh Shah, MD of Kotak Mahindra AMC, told Mint that the worst of the valuation excesses is behind us, but volatility may remain high due to geopolitical risk and return expectations need to be moderated.
VK Vijayakumar, Chief Investment Strategist at Geojit Investments, said while fundamentals favour a rally delivering decent returns of around 12 to 15%, there is no scope for a runaway rally that can deliver returns above 15%.
The domestic market in 2026 is expected to remain a stock-pickers market. It will reward those who bet on quality stocks with healthy fundamentals, earnings visibility, and rational valuations. Focusing on long-term and aligning investments to risk appetite and investment goals are the thumb rules investors should follow during times of uncertainty.