Daily Voice | Don’t expect major tax-structure changes in Budget; earnings outlook cautiously optimistic, says Client Associates co-founder

Rohit Sarin is the Co-Founder of Client Associates

• Don’t expect major changes to tax structures in Budget
• Earnings outlook remains cautiously optimistic rather than outright bullish
• Remain overweight on large cap equities but neutral on equities overall

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According to Rohit Sarin, the Co-Founder of Client Associates, the Union Budget 2026 is unlikely to bring any major changes to tax structures. The emphasis is more likely to remain on stability and continuity rather than introducing disruptive tax measures, he said in an interview to Moneycontrol.

He believes that earnings growth has likely bottomed out but does not expect a sharp or immediate rebound. The recovery in earnings is expected to be gradual and uneven across sectors, he said.

However, he is of the view that sustained acceleration will depend on a pickup in consumption, private capex, and global growth conditions. As a result, his outlook on earnings remains cautiously optimistic rather than outright bullish.

Do you believe India is likely to outperform global markets in 2026 despite the ongoing weakness?

US equity markets currently account for close to 70 percent of the total global equity market capitalization. Within the US markets, the top seven technology companies alone contribute nearly 30 percent of overall market capitalization, highlighting a high degree of concentration. This concentration, combined with elevated valuations in US equities, increases the risk of underperformance if earnings expectations or liquidity conditions change.

In contrast, Indian equity market valuations are broadly in line with long-term historical averages. When viewed alongside India’s relatively stable macroeconomic environment, resilient domestic demand, and improving balance sheets across corporate and banking sectors, the probability of Indian markets outperforming US and global markets in 2026 appears reasonably high. This relative valuation comfort and macro stability provide a supportive base for medium term outperformance.

Is this the right time and a good opportunity to rotate portfolios, given the sharp correction from record high levels?

It is extremely difficult to consistently time the markets, especially during phases of heightened volatility. We therefore advise investors to take portfolio decisions based on their long term asset allocation rather than reacting to short term market movements. Our current stance remains overweight on large-cap equities while being neutral on equities overall.

Large caps continue to offer better visibility on earnings and balance sheet strength. If an investor’s current allocation to equities or large caps is lower than their intended strategic allocation, this correction can be used as an opportunity to gradually increase exposure in a disciplined manner rather than making aggressive tactical calls.

Do you think the government is unlikely to announce significant changes on the tax front in the upcoming Budget?

Lower inflation has resulted in lower than normalized nominal GDP growth, which in turn has had an impact on the pace of growth in tax collections. At the same time, the government undertook meaningful rationalization of direct taxes in last year’s Budget, which has already provided relief to taxpayers and improved compliance.

Given these factors, along with the government’s continued focus on fiscal consolidation, we do not expect any major changes to tax structures in the upcoming Budget. The emphasis is more likely to remain on stability and continuity rather than on introducing disruptive tax measures.

What could be the government’s key focus areas in the Union Budget that may help revive a bull market and pull markets out of the current bear trap?

Over the last three fiscal years, the government has made aggressive and growth-oriented allocations towards capital expenditure, which has played a key role in supporting economic activity. As this capex-led cycle matures, the government’s fiscal policy now appears to be gradually tilting towards reviving consumption-driven demand. This could be achieved through targeted support measures, welfare schemes, and incentives aimed at boosting discretionary spending.

We expect this policy stance to continue, as stronger consumption can help improve capacity utilization, corporate earnings visibility, and overall market sentiment.

Are you bullish on the earnings cycle, with the belief that earnings have bottomed out in Q3 FY26?

While we believe that earnings growth has likely bottomed out, we do not expect a sharp or immediate rebound. The recovery in earnings is expected to be gradual and uneven across sectors. Over the next three to four quarters, earnings growth may improve modestly as demand stabilizes and input cost pressures ease.

However, sustained acceleration will depend on a pickup in consumption, private capex, and global growth conditions. As a result, our outlook on earnings remains cautiously optimistic rather than outright bullish.

Do you think the US trade deal is more important from a psychological standpoint than from a fundamental perspective?

Yes, that is correct. From a macroeconomic standpoint, the impact of the US trade deal on India’s overall GDP growth is limited. However, such developments play an important role in shaping market sentiment and investor confidence.

Improved trade relations can reduce uncertainty, support risk appetite, and positively influence capital flows, making the psychological impact more meaningful than the direct fundamental impact.

Are valuations still stretched in mid-cap stocks? Do you believe there is further downside risk in overvalued stocks?

Valuations in the mid-cap segment remain around one standard deviation above their long-term averages. While this does not necessarily imply an immediate sharp correction, it does suggest a limited margin of safety.

Unless earnings growth improves meaningfully and catches up with expectations, there remains scope for further time correction or price correction in overvalued mid-cap stocks. Investors should therefore remain selective and focus on companies with strong fundamentals and sustainable earnings visibility.