Cautious Confidence: Why investors should temper optimism and stay selective

Markets in red for second straight session as India-Pak tensions intensify; sectorally, capital goods and PSU Banks in green

Geopolitical tensions have once again entered the market narrative, with recent border hostilities drawing comparisons to past military conflicts. Yet, if history is any guide, limited engagements of this nature have rarely derailed India’s equity markets in any lasting way. Market reactions have typically been swift but short-lived, followed by strong recoveries once the scope of the conflict became clearer and appeared contained. The more important and lasting impact on markets is how the underlying stocks fare—and there is no reason to be either pessimistic or overly optimistic on that count, as equity valuations today are neither cheap nor expensive.

History of conflict
During previous incidents, such as the 1999 conflict or the more recent surgical strikes, equities saw brief periods of volatility followed by sharp rallies. For instance, past data shows that markets fell ahead of conflict announcements but gained significantly during and after the events—often posting double-digit returns within a year of the flare-ups. This pattern suggests that as long as the current geopolitical situation does not escalate into a full-scale war, markets are likely to absorb the shock and refocus on underlying fundamentals.

The earnings story
And those fundamentals are beginning to show signs of strength. The latest quarterly earnings season has come in better than expected for a majority of companies. Analysts expect that FY26 could well be a year where earnings growth climbs back to around 12%, which would imply a valuation of 18.4 times for the Nifty 50—neither cheap nor expensive by historical standards.

Fund flows turn a corner
The relationship between fund flows and market performance is a classic chicken-and-egg story. While momentum investors often argue that flows create performance—more demand leads to rising prices—in the end, every asset gets priced based on the returns the underlying businesses can generate. Thus, earnings remain the key driver of valuations.

Even so, the good news is that foreign flows are turning supportive. FII flows since April 15, when inflows into the cash segment turned positive, amount to $5.8 billion. Several foreign investors suggest this is a tactical shift in favor of India, given that two major markets—the US and China—face significant uncertainty. A correction in Indian equities also provided a decent entry point for those who were previously skeptical about valuations. For now, flows look favorably poised, as foreign investors deploy fresh capital and domestic flows remain stable.

India’s structural growth story
India appears to be on solid footing amid global trade disruptions. If the government is able to negotiate favorable trade deals with the EU and the US, there could be meaningful upside, with manufacturing finally taking off and the
China Plus One opportunity scaling up on the ground.

However, significant risks persist. The second-order impact of elevated tariffs on China remains unclear. These could be disruptive for several industries, where even safeguard duties imposed by the government might not prevent pressure on profitability. Another looming disruption is the rise of AI and its impact on job growth. The IT sector has been one of India’s largest job creators, but hiring has stalled and could soon see cuts as companies pursue greater efficiency by adopting AI—especially at a time when revenue growth is harder to come by. Sustained job creation will be crucial to support consumption growth, which remains fairly muted in the private sector.

Should you buy stocks now?
This is not a runaway market. Stocks are moving based on news—either positive earnings surprises or favourable business developments. For instance, in recent sessions, textile stocks surged following positive news about the UK FTA. Other big gainer each day are stocks that surprise on earnings expectations. However, positive developments are getting priced into markets too quickly, making it harder for investors to maintain discipline while making purchases. A hawk’s eye on valuations will be essential to limit downside risk. This isn’t a market to chase or fear—it's one to navigate with discipline. Measured moves, from governments, markets, and investors alike, will define the winners in this phase.

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