Indian equities 2026: valuations reset after 40% cuts

Why the “tide turning” debate is back

Indian equities have opened 2026 with a mix of weak headline performance, sharp internal corrections, and a renewed argument over valuation comfort. A session from The Big Review 2026 featuring Varun Lohchab, Chief Research Officer - Equities at HDFC Securities, framed the moment as one where the risk-reward equation is improving for investors, even as macro and geopolitical risks remain.

The core of the bullish narrative is that a steep correction in mid and small caps has reset several stock-level valuations, creating what Lohchab called some of the best entry points in nearly two years. The counterpoint from other strategists is that India still trades at elevated multiples, and that the recent phase may be more than a cyclical pause.

HDFC Securities: macro resilience despite geopolitical headwinds

Lohchab’s base case keeps India’s growth picture relatively steady. In the session, he pointed to real GDP remaining in a 6.5% to 7% range, and flagged that the growth hit from ongoing geopolitical issues is expected to be around 40 to 50 basis points. He also noted that nominal growth can “look much better” with improvement in inflation, starting from a low base.

That macro framing matters because it supports the argument that the recent pain in equities is not necessarily being driven by a collapse in domestic fundamentals. But it also does not remove the near-term uncertainty around global volatility and commodity prices, including the reference to $100 crude as a headwind.

The correction: headline indices vs the median stock

A key datapoint from Lohchab’s discussion was the divergence between index performance and what the “median stock” has experienced. He said that while the index has fallen 23% from its 2024 highs, the median stock correction is around 40%.

This split is important for investors trying to interpret broad market signals. It suggests large index constituents may have held up better, while many mid and small cap names have adjusted meaningfully. Lohchab added that the correction is providing better entry points on a 12- to 18-month view, but he also described the setup as a “bottom-up market” because aggregate valuations are still high and some sectors remain rich.

Valuations and FPI flows: what the market-cap-to-GDP lens shows

Lohchab also linked foreign investor behaviour to valuation regimes. In his historical framing, he described a phase where market-cap-to-GDP moved from around 70% to 80% up to about 130%, a re-rating that contributed to more aggressive foreign selling in recent years.

He also described “time correction” as a mechanism that can make stocks cheaper over time even without a sharp index fall, reinforcing the view that the adjustment may continue to be uneven across sectors and stocks.

Kotak Institutional Equities: “blip” vs “permanent reset” risk

A separate strategy note from Kotak Institutional Equities sharpened the other side of the debate. Sanjeev Prasad, Managing Director and Co-Head of Strategy, said the correction could be a temporary blip or the start of a permanent reset in market multiples to more realistic levels, adding that several sectors may still face further de-rating through price correction or time.

Kotak also highlighted that muted returns have not automatically translated into cheap valuations. The note cited the Nifty 50 trading at about 19.9 times FY2027 estimated earnings and 17.4 times FY2028 earnings, which it said remain elevated given recent market performance.

Flows and positioning: foreign selling vs domestic support

Kotak’s note also quantified the divergence in positioning. Foreign portfolio investors (FPIs) have been net sellers in 2026, with outflows of about $1 billion so far in the calendar year. Domestic institutional investors (DIIs), driven largely by mutual funds, have bought around $1.6 billion so far in 2026.

Those domestic flows have helped limit downside in headline indices even while foreign investors stay cautious. Kotak also flagged retail investor behaviour as a key variable influencing how quickly the market’s valuation adjustment plays out.

Broker calls for FY27: optimism, downgrades, and target cuts

Brokerage views in the provided material were notably split. Jefferies was described as bullish on India with an overweight stance on banks and pharma. ICICI Prudential was cited saying the current sentiment is positive to buy.

On the other side, Nomura was noted as downgrading India on elevated energy prices, preferring Korea or MSCI China equities. Goldman Sachs was cited as downgrading India and cutting its Nifty target to 25,900 from 29,300. A separate snippet also mentioned Goldman Sachs setting a target of 29,000, underlining how targets can vary across notes and time periods in the same market.

A volatile start to 2026: what market tape shows

Another data point in the material was that Indian stock markets could be seeing the worst start to a year in a decade, with equities down about 4% and the Nifty off to its worst start since 2016. It also cited that local stocks wiped out around $160 billion in value during the month referenced.

The same set of notes described a two-session recovery, with the Sensex rising 487 points to 82,345 and the Nifty 50 gaining 167 points to 25,343, while midcaps and smallcaps did better on those sessions.

Key numbers at a glance

Cross-asset signposts mentioned alongside India

The material also listed bull and bear cases across other assets and themes, highlighting what investors were watching alongside Indian equities.

Why the setup matters for investors

Taken together, the inputs present a market where the index-level picture can look stubbornly expensive, while many individual stocks have already repriced meaningfully. Lohchab’s framing emphasises that the opportunity, if any, is more likely to be captured through stock selection rather than relying on a broad, fast rebound.

At the same time, Kotak’s argument is that a longer de-rating process cannot be ruled out, particularly if disruption across sectors increases and investment does not keep pace, with retail flows delaying the adjustment rather than removing it.

Conclusion

The 2026 debate on Indian equities is balancing two hard facts from the same dataset: a 40% median correction has created pockets of value, but the Nifty still trades at elevated forward multiples and foreign investors remain net sellers. Near-term direction is likely to keep hinging on earnings expectations, commodity and trade risks, and whether flows broaden beyond domestic support as global risk appetite stabilises.