After a year of consolidation, Motilal Oswal expects markets to deliver steady growth in 2026: Check its favourite sectors

After a year of consolidation, Motilal Oswal expects markets to deliver steady growth in 2026: Check its favourite sectors

• Motilal Oswal predicts steady Indian stock growth in 2026 post-2025 consolidation.
• Large-cap stocks preferred for their more reasonable valuations over mid and small caps
• Top investment sectors: financials, consumer discretionary, and industrials

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Indian stock markets are likely to deliver steady growth in the upcoming year 2026 after a phase of consolidation this year, Motilal Oswal Financial Services said in its report of 2026 outlook.

Indian benchmark indices closed in the red on December 24, with Sensex falling over 116 points (0.14 percent) to 85,408.70, and Nifty 50 dropping 37 points (0.14 percent) to 26,139.70.

The domestic brokerage said that Indian equity markets are entering 2026 while trading close to all-time highs. It noted that Nifty is ending the calendar year 2025 after rising 10 percent on a year-to-date basis. It however held a positive view for the next year, supported by a recovery in corporate earnings and a gradual revival in private sector investments.

"Recent and forthcoming government policy measures should further aid this recovery. The Union Budget 2026 will be a key event to watch, as it is likely to set the direction for FY2026-27," Motilal added.

'India's long-term structural growth story remains intact'

India's long-term structural growth story remains intact, supported by favourable demographics, rising digital adoption, increasing financialisation of household savings and continued reform momentum, the brokerage said. "We believe the government's ongoing policy initiatives will help reset the trajectory of corporate earnings over the medium term. Additionally, any resolution of the tariff stalemate with the US could act as an important external catalyst for markets," it added.

Largecaps over small, midcaps:

From a valuation standpoint, Motilal explained why largecaps are relatively more reasonable after recent consolidation, while midcap and small-cap stocks warrant a more selective approach, with a focus on companies that have strong balance sheets, sustainable cash flows and clear earnings visibility.

"From a valuation standpoint, the Nifty-50’s one-year forward P/E stands at 21.5x, around 4% above its long-period average (LPA) of 20.8x. In comparison, valuations in the broader market remain elevated. The Nifty Midcap-100 and Nifty Smallcap-100 are trading at P/E multiples of 28.3x and 25.9x, representing premiums of ~26% and ~50% over their respective long-term averages," it added.

Which are Motilal's favourite sectors?

From an investment perspective, Motilal held a positive stance on large-cap stocks, particularly in sectors where earnings growth is strong and valuations remain reasonable. Financials continue to be preferred segment, backed by healthy credit growth, improving return ratios and strong balance sheets. It also remains positive on consumption-linked sectors such as consumer discretionary and automobiles, as demand recovery broadens and revenue growth improves.

Industrials and capital goods remain well positioned, benefiting from government-led reforms, infrastructure spending and localisation initiatives across manufacturing, electronics, data centres and energy transition-related segments, it added. “We are constructive on IT services from a medium-term perspective, as global technology spending is expected to recover gradually with stabilising macro conditions and increased focus on digital transformation, AI and efficiency-led adoption,” the brokerage further said.

Looking back at 2025:

2025 proved to be a year of consolidation and recalibration for Indian equity markets, marked by intermittent volatility and global headwinds, Motilal said. Nifty had entered this year in correction mode after touching record highs in September 2024, with the correction extending until early April 2025 amid the imposition of trade tariffs by the US.

The brokerage noted that market movements through 2025 were largely influenced by global trade dynamics, persistent FII outflows, currency volatility and evolving geopolitical developments. Markets remained range-bound amid moderation in earnings growth across select sectors, especially in small-cap stocks, despite a relatively stable domestic macroeconomic backdrop.

Towards the end of the year, however, Motilal noted that the Nifty recovered most of its losses and went on to make new record highs, reaching 26,325 on December 1. Broader markets displayed mixed trends, with midcaps showing relative resilience, while small-caps witnessed sharper bouts of volatility.

"After two years of a sharp rally—when the Nifty Midcap100 delivered returns of 46% and 24% in 2023 and 2024, respectively, and the Nifty Smallcap100 generated 56% and 24% over the same period—2025 turned out to be a year of consolidation for the broader market. The Nifty Midcap100 managed a modest ~6% annual return, while the Nifty Smallcap100 declined by ~-6%," it said.

Which factors shaped Indian stock markets in 2025?

While listing out the domestic and global factors which shaped market performance in 2025, Motilal said that easing by the Reserve Bank of India (RBI) emerged as a key stabilising force. During the year, the Indian central bank implemented four repo rate cuts amounting to a cumulative 125 basis points, bringing the policy rate down to 5.25 percent. Motilal said that this easing cycle was supported by low inflation and resilient economic growth.

RBI’s 100 basis points Cash Reserve Ratio (CRR) cut, announced in June 2025 and implemented in four tranches also improved liquidity conditions. “The RBI also conducted multiple open market operations, including a ₹1 lakh crore government securities purchase in December 2025, to inject durable liquidity into the system,” it said.

“Overall, CY2025 was a year of consolidation marked by volatility and global uncertainty, but it also helped reset valuations and investor expectations. As we move into 2026, improving earnings visibility, supportive policy measures and the potential turnaround in FII flows create a favourable backdrop for Indian equities. We remain optimistic on the long-term compounding potential of Indian markets and advise investors to stay disciplined, focus on quality businesses and use market volatility as an opportunity to build exposure fundamentally strong businesses aligned with India’s structural growth themes,” it added.