Daily Voice | Earnings growth to strengthen into 2026; broader lift needs credit, capex: Anirudh Garg

Anirudh Garg is the Partner and Fund Manager at INVasset PMS

Earnings growth can begin to improve in 2026, with a reasonable chance of better momentum versus late 2025, but the path may be lumpy across sectors, said Anirudh Garg, Partner and Fund Manager at INVasset PMS, in an interview with Moneycontrol.

According to him, broad-based acceleration in earnings is more likely when credit growth, government capex execution, and private investment intent move together.

He is of the view that a 15–20 percent market rally in 2026 is possible, but treating it as a base-case expectation would be premature because it requires multiple variables to align at the same time. "If earnings compound strongly and the cost of capital eases, the index can deliver high-teens returns even without exuberance," he said.

A “strong year” for new-age companies in 2026 is more likely to be decided by micro fundamentals than by a broad risk-on tide. Competitive intensity remains structurally high in most digital categories because customer acquisition is still contested, switching costs are often lower than perceived, and incumbents have also learned to compete with capital and data. In that setting, revenue growth alone is unlikely to be sufficient for sustained outperformance; the market is increasingly rewarding clear unit economics, predictable contribution margins, and credible paths to free cash flow generation.

The more supportive case for 2026 is that capital has become more selective, which can reduce irrational price wars and push weaker models into consolidation, partnerships, or rationalization. If that discipline holds, a subset of businesses could see improved pricing power and better operating leverage.

However, this is not a uniform outcome across the “new-age” bucket; categories exposed to frequent discounting, regulatory scrutiny, or commoditized supply may continue to see volatility even if top-line growth looks healthy.

Valuations and market positioning also matter. Where expectations already embed flawless execution, even good results can be met with muted price response. Conversely, companies that demonstrate improving cash conversion cycles, lower customer acquisition intensity, and durable retention metrics may see rerating potential. Overall, 2026 could be constructive for select new-age businesses, but it is more likely to be a year of differentiation than a synchronized upcycle for the segment.

Earnings visibility in the power sector has improved materially over the last few years, but its durability depends on where in the value chain one is looking and on the stability of the policy and payment ecosystem. The more visible segments typically share three features: contracted revenues, pass-through frameworks for key input costs, and stronger counterparty discipline. Where these conditions hold, earnings tend to be less sensitive to short-term demand swings and more driven by capacity utilization, regulated returns, and execution of capex pipelines.

A constructive base case for “visibility continuing” rests on three drivers: sustained demand growth from electrification and industrial activity, continued grid capex to absorb renewables, and better contracting structures that reduce merchant exposure. The key watchpoints are receivable days, regulatory timelines, and how quickly ancillary infrastructure (storage, transmission, flexible capacity) scales. Net-net, visibility can remain relatively strong, but it is likely to be uneven—stronger in contracted and regulated pockets, and more cyclical where exposure to spot prices, policy timing, or counterparty health is higher.

A rollback of legacy tariff rates can have both sentiment and fundamental effects, but the balance between the two depends on scope, sequencing, and whether it durably reduces uncertainty. In the near term, markets tend to respond quickly because tariffs are a visible signal of trade posture. Even incremental de-escalation can compress risk premia, improve business confidence, and support equity multiples—particularly in globally integrated sectors where policy uncertainty has been a persistent overhang.

The more fundamental channel works through lower input costs, reduced frictions in supply chains, and improved export competitiveness where retaliatory measures ease. Over time, that can support margins and volumes. However, the magnitude should not be overstated. Many supply chains have already adapted through re-routing, localization, and inventory buffers; part of the tariff impact has been embedded into pricing, sourcing strategies, and capital allocation decisions. A rollback may therefore deliver incremental relief rather than a full reversal of earlier economic distortions.

There is also a second-order macro consideration: tariffs interact with inflation, central-bank reaction functions, and fiscal expectations. If tariff reductions ease goods inflation at the margin, they can create room for more accommodative financial conditions, indirectly supporting growth and earnings. But if the rollback is partial, politically contested, or paired with new sector-specific restrictions, the net outcome can remain uncertain.

Overall, a meaningful, broad-based, and credible tariff easing would likely be supportive for real economic activity over time, but the first impact is often sentiment-driven. The durability of the move would be judged by follow-through—trade negotiation progress, clarity on future policy, and evidence that corporate investment plans are becoming less defensive.

A 15–20 percent market rally in 2026 is possible, but treating it as a base-case expectation would be premature because it requires multiple variables to align at the same time. Equity returns at that magnitude typically come from a combination of earnings growth and either stable-to-improving valuations or a clear liquidity/flow tailwind. If earnings compound strongly and the cost of capital eases, the index can deliver high-teens returns even without exuberance. But if valuations are already elevated in parts of the market, the same earnings growth can translate into more moderate index returns as multiples normalize or remain range-bound.

The assumption that “the worst is now behind” is itself the key sensitivity. Markets often bottom ahead of fundamentals, but 2026 outcomes will likely be shaped by the path of inflation, global growth, and policy—particularly how quickly rate cuts, if any, transmit into credit growth, consumption, and capex. Domestic liquidity and participation trends can provide resilience, yet they do not eliminate drawdowns if global risk aversion rises or if earnings disappoint versus expectations.

A reasonable institutional framing is scenario-based. In a constructive scenario—benign inflation, steady domestic demand, improving capex cycle, and stable global conditions—high-teens returns are within reach. In a more mixed scenario—patchy global growth, intermittent risk-off episodes, and earnings that grow but do not surprise—returns may be positive but lower, with higher volatility and sharper rotations under the surface. The risk scenario is where growth slows unexpectedly, or policy uncertainty rises, compressing multiples even if earnings are not collapsing.

Therefore, the probability of a 15–20 percent rally exists, but it is not a default. The more dependable strategy is to focus on the breadth of earnings, balance-sheet strength, and valuation discipline rather than targeting a specific index number.

Earnings acceleration from the start of 2026 is plausible, but it should be framed as a conditional probability rather than a straight-line extrapolation. The early part of any calendar year is often shaped by base effects, inventory cycles, and the lagged impact of financial conditions. If interest rates are on a durable downshift and liquidity remains supportive, operating leverage can improve and credit-sensitive segments can start seeing better volume growth. That is typically the setup in which earnings growth broadens beyond a narrow leadership cohort.

However, acceleration “from the start” requires that multiple drivers show up simultaneously: demand holding up in both urban and rural pockets, input-cost stability that protects margins, and a capex cycle that translates into order flows and utilization rather than staying confined to balance sheets. Externally, the outlook for exports and global manufacturing also matters. If developed-market growth is uneven or if trade policy uncertainty persists, globally exposed earnings can remain choppy even while domestic-facing businesses improve.

A balanced view is that earnings growth can begin to improve into 2026, with a reasonable chance of better momentum versus late 2025, but the path may be lumpy across sectors. Broad-based acceleration is more likely when credit growth, government capex execution, and private investment intent move together. Absent that synchronization, 2026 may still deliver healthy earnings, but with staggered timing rather than a clean inflection right from the start.

The Bank of Japan’s move to 0.75 percent is symbolically significant because it reinforces Japan’s exit from an era of ultra-low rates and signals a greater willingness to normalize policy if domestic inflation dynamics and wage trends allow. For global markets, the first-order implication is the potential reshaping of capital flows. Japan has long been a funding source for global carry trades; higher domestic yields can reduce the incentive to deploy capital abroad, particularly if risk-adjusted returns compress elsewhere. This can tighten global financial conditions at the margin, especially during periods of risk-off when investors prefer to repatriate.

For the Japanese currency versus the US dollar, the direction is not mechanically one-way. A rate hike can support the yen, but the relative rate differential still matters more than the absolute move. If US yields remain meaningfully higher, the dollar can stay supported even as Japan tightens. The yen’s path will also reflect forward guidance and whether markets price a sustained hiking cycle or treat this as cautious normalization. Short-term volatility is likely as positioning adjusts.

For India, the direct trade impact is limited compared to larger partners, but the financial spillovers matter. If global yields rise or risk premia widen due to repatriation flows, emerging-market assets can see intermittent pressure, including on bonds, equities, and currency. Conversely, a stronger yen can support Japanese outbound investment sentiment over time, which is relevant for India’s manufacturing and infrastructure investment corridors. The practical takeaway is that this BOJ shift adds another variable to global liquidity conditions in 2026: not necessarily a risk event by itself, but a regime change that can amplify market moves when combined with US policy uncertainty and global growth surprises.