Expert view: Kush Gupta, Fund Manager and Director at SKG Investment and Advisory, believes the Indian stock market may see a flat or positive ending in 2026, but only if crude oil stays subdued, FPI flows turn net positive and earnings recovery. In an interview with Mint, Gupta said the recovery will not be index-wide, but will be confined to sectors. He is positive about the defence, financial services, and pharma sectors. Edited excerpts:
How do you see the market’s performance in H1CY26? Can the second half see a rally that pulls the Nifty out of negative territory?
The first half of the calendar year 2026 (H1CY26) has been a study in compression. The Nifty 50 opened the year at a record high of 26,373 on January 5, corrected nearly 15% to a 52-week low of 22,182 by April 2 and has since recovered around 8.5% from that bottom, leaving it down roughly 8% year to date as of mid-June.
The correction was not random; it was the market pricing in persistent FPI selling, escalating West Asia geopolitical risk and subdued earnings growth. The recovery since April has been tentative, continuing on a sideways journey.
For H2CY26 to produce a recovery into positive territory, three conditions must align: improving macro indicators, easing geopolitical tensions and a strong earnings trajectory. A rally from H2CY26 onward remains possible.
We believe a full recovery to flat or positive on the calendar year is achievable, but not the base case; it requires crude to stay subdued, FPI flows to be net positive, and the FY27 earnings recovery to actually materialise in Q2 numbers.
If any one leg buckles, the market consolidates rather than rallies.
Considering the current macro setup and expectations of rate hikes, do you think earnings recovery could be delayed to Q3FY27 or even beyond?
In its June MPC meeting, the RBI kept the repo rate unchanged at 5.25%, but simultaneously raised CPI inflation projection for FY27 to 5.1% from 4.6% earlier and cut GDP growth to 6.6% from 6.9%, a stagflationary signal in all but name.
The 5.1% full year inflation sits above the RBI’s 4% target, with a Q3 peak of 5.9% uncomfortably close to the upper 6% tolerance limit, raising the real possibility of a hawkish pivot at August or October meetings.
This dual shock, inflation revised up, growth revised down, is a compounding policy headwind that makes near-term rate cuts structurally off the table.
On earnings, the FY27 recovery timeline is under stress. Given the RBI’s June policy shock, inflation revised up 50 bps, growth cut 30 bps, and the Q3FY27 inflation peak at 5.9%, any meaningful broad-based earnings recovery is likely deferred to Q3FY27 at the earliest and possibly Q4FY27 for sectors exposed to input cost pressures.
The recovery will not be index-wide; it will be confined to sectors with pricing power and contracted revenue, which is precisely why niche sector selection, not broad beta, is the only route to alpha in this environment.
Should investors trim exposure to equities and increase allocation to safe-haven asset classes?
The honest answer is: it depends on where in equities you are sitting. Blanket rotation out of equities ignores a critical valuation reality.
As of mid June 2026, the Nifty 50 PE ratio stands at 20.8 times on a consolidated trailing twelve months basis, sitting below its 10-year historical median of around 23 times, placing the market in a ‘fairly valued to slightly undervalued’ zone rather than at bubble levels.
Trimming at this level is a timing call, not a valuation call, and timing calls are notoriously difficult to execute profitably. That said, the composition of your equity book matters more than the headline index level.
The Nifty 50 trades at approximately 21 times PE, an 11% discount to its 10-year median of 23 times, placing large caps in genuinely attractive valuation territory relative to their own history.
The Nifty Midcap 100 trades at approximately 29 times PE, itself an 8% discount to its 10-year median of 32 times, suggesting mid-caps have also corrected to below long-run fair value.
The Nifty Smallcap 100, at approximately 32 times PE, trades broadly in line with its 10-year median of 31 times, fair value, not a bargain and importantly, without the margin of safety that large caps now offer.
The actionable read is narrow and specific: investors running outsized small cap exposure should trim that concentration and rotate into large caps, which currently offer better valuation comfort, lower earnings volatility and a 11% discount to their own 10-year history, a more favourable risk reward than small caps at fair value with thinner earnings buffers in a 5.1% inflation environment.
For investors where capital preservation is the primary objective, reallocation toward short-duration debt or gold as a safe-haven hedge is the right call.
The trimming case, however, is confined strictly to high small-cap exposure; wholesale rotation out of equities at a market level discount to long-term median PE would be a strategic error.
Can IT be a contrarian call at this juncture?
The contrarian case for IT is structurally weak, and the valuation reset alone is insufficient justification.
IT stocks are down approximately 25% year to date, even as the Nifty 50 fell around 9%, meaning the sector has meaningfully underperformed even a falling broader market.
That underperformance reflects a structural concern, not a cyclical one. AI is actively cannibalising traditional outsourcing demand, not supplementing it.
Reallocation of client spending toward AI infrastructure is weighing on traditional outsourcing budgets, resulting in lower discretionary IT projects and slower services demand growth.
On guidance, the numbers are uninspiring. Infosys crossed $20 billion in FY26 revenues but guided FY27 at only 1.5-3.5% revenue growth, with an operating margin of 20-22%.
That guidance range is not the foundation for a conviction buy. Within the broader thesis that alpha comes from niche sector selection, IT as a broad sector call is inconsistent; it does not have contracted sovereign revenues, inelastic demand, or structural domestic tailwinds.
IT is not a contrarian call; it is a value trap in its current form for large-cap names. The only defensible entry is in mid-tier names with proven AI native deal momentum where revenue growth is structural, not cyclical.
Buying TCS or Infosys purely on valuation compression without a visible earnings catalyst is low conviction and inconsistent with an alpha through a sector selection framework.
The critical missing link for a broad sector buy is deep, revenue-generating integration into the AI value chain, and Indian IT is not there yet.
While leaders like TCS and HCL Tech are engaging in targeted M&A and partnerships to shift toward AI orchestration and enterprise deployment, the ‘implementation super cycle’ is still in early stages, and value has not yet migrated meaningfully from AI infrastructure to Indian IT services revenue.
Until Indian IT firms demonstrate that AI-native deals are converting into measurable top-line acceleration, not just pipeline announcements and partnership MoUs, the sector does not meet the bar for conviction overweight.
Which sectors do you believe can generate alpha over the next 1-2 years?
Defence is the clearest structural call with contracted sovereign revenues. India’s indigenous defence production hit ₹1.78 lakh crore in FY26, up 15.6% year on year, while exports surged 62.7% to a record ₹38,424 crore.
BEL’s order book stood at ₹73,882 crore as of April 1, 2026, with FY26 revenue up 16.15% and management guiding over 15% growth for FY27.
Financial services remain overweight. Bank credit grew 17.1% year on year as of March 31, 2026, confirming the credit cycle is structurally intact.
Pharma is bullish. The Indian pharmaceutical market expanded 10.7% MAT in May 2026, with volume growth now contributing 3.2 percentage points versus just 0.8 percentage points a year earlier.
IT, chemicals, and FMCG mass premium face continued structural headwinds and remain underweight.
What should be the short-term investment strategy in the current market?
In this environment, the broader market will remain range bound near to medium term; attempting to generate returns through broad index beta is a low probability strategy.
The playbook is therefore: build positions in sectors where revenue is contracted and not macro dependent, defence order books, financial services with NIM recovery in H2FY27, pharma with domestic formulation resilience.
The Q3 inflation peak at 5.9% implies the RBI could be forced into a hawkish posture at the August or October MPC, and use any pre-August rally to reduce exposure to high PE, earnings-sensitive sectors.
Short-term strategy is selective accumulation in quality large caps and mid caps with visible earnings drivers, disciplined trimming of high PE small caps and cyclically exposed names and maintaining a partial hedge in short-duration debt or gold, not a risk-off rotation, but a tactical rebalancing that reflects a range-bound market where alpha is sector specific.
How should investors approach allocation across large, mid, and small caps?
The valuation data makes the allocation call unusually clear at this juncture. The Nifty 50 trades at approximately 21 times PE, an 11% discount to its 10-year median of 23 times, placing large caps in genuinely attractive territory relative to their own history.
The Nifty Midcap 100 at 29 times PE is itself an 8% discount to its 10-year median of 32 times, meaning mid-caps have also corrected to below long-run fair value.
The Nifty Smallcap 100 at 32 times PE trades broadly in line with its 10-year median of 31 times, fair value, not a bargain and without the margin of safety that large caps currently offer.
The allocation framework writes itself from this data. Large caps are the highest conviction position, trading at a discount to their own decade-long average with lower earnings volatility in a 5.1% inflation environment.
Mid-caps at an 8% discount to long run median are selectively accumulated, concentrated in sectors with visible FY27 earnings drivers, defence, financials and pharma.
Small caps at fair value, with thinner earnings buffers and less pricing power, offer no valuation edge over large caps to compensate for their additional risk.
Investors with high small-cap concentration should rotate that exposure into large caps, which are currently cheaper while carrying lower volatility, meaningfully.
The suggested allocation framework in this environment: approximately 60-65% large cap, 25-30% selective mid cap and small cap held at or below 10% until a credible earnings acceleration thesis emerges.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
