India’s markets entering a ‘Fosbury moment’ as old economic playbooks fail, says DSP MF

DSP says consumption remains a key support for the economy. Private consumption contributed about 62% of India’s Rs 331 trillion GDP in FY25. However, the pattern of spending has changed.

• DSP Mutual Fund says macro signals are less reliable for 2026 market forecasts
• Focus shifts to valuations, balance sheets, and bottom-up stock picking
• India sees rising digital use, changing consumption, and stronger corporate finances

Did our AI summary help?

For decades, investors relied on traditional economic playbooks. However, in its 2026 equity note titled "Beyond the Efficient Frontier," DSP Mutual Fund suggests that markets are undergoing a shift, similar to the moment when Olympic high-jumper Dick Fosbury challenged the accepted technique by clearing the bar backwards in 1968, a moment that came to be known as Fosbury Flop.

DSP says that as old macro signals lose reliability, the focus for 2026 will need to shift towards valuations, balance-sheet strength, and bottom-up stock selection rather than predicting economic cycles.

Macro signals

According to the fund house, links between money supply and inflation, interest rates and recessions, fiscal deficits and bond market stress are no longer behaving as expected, making macro forecasting less dependable.

The report highlights several global outcomes that break with past patterns. Large-scale money creation did not lead to a sustained weakening of the US dollar. The fastest interest-rate tightening cycle in decades did not trigger a recession or a prolonged equity market decline. Major geopolitical shocks failed to cause lasting spikes in oil prices.

In some periods, equities, bonds, and precious metals rose together, an unusual combination by historical standards. At the same time, global uncertainty remains near record levels.

India’s contradictions

India, according to the report reflects many of these global shifts. Heavy foreign institutional investor selling, which earlier destabilised markets, has been absorbed by domestic investors. A steady pipeline of IPOs has also been digested without major stress.

DSP says consumption remains a key support for the economy. Private consumption contributed about 62% of India’s Rs 331 trillion GDP in FY25. However, the pattern of spending has changed.

Data from the Household Consumption Expenditure Survey 2025 shows food taking a smaller share of household budgets, while discretionary spending has increased. Items such as vehicles, air conditioners, and smartphones are now more widely purchased across income groups.

Digital shift

Digital adoption has also accelerated this transition. India now has about 84 crore internet users, double the number in 2016. UPI transactions have scaled to around 70 crore per day, exceeding global card networks by volume. The value of mobile phone sales has overtaken passenger vehicle sales.

Much of the shift in spending is taking place in quick-commerce and digital-first businesses, many of which are outside the listed market. DSP says evaluating these companies remains challenging as several are still investing heavily in growth.

Valuations changing

While headline valuations appear stable, DSP says the internal structure of the market has changed sharply. The overall price-to-earnings ratio of the Nifty 500 has remained broadly flat over the past decade.

However, stocks trading above 50 times earnings now account for about 23% of the index, compared with less than 5% ten years ago. At the same time, the share of stocks trading below 15 times earnings has fallen to about 13%.

Competition and trade risks

The report also flags rising competition in sectors once dominated by a few players, including paints, building materials, cables, soft drinks, grocery retail, and value fashion. Corporate balance sheets have strengthened, with net debt-to-equity for NSE 500 companies excluding banks falling from 54 percent in FY19 to 42 percent in FY26.

On risks, DSP points to global trade policy. US tariff actions, including those linked to India’s purchase of Russian crude, have affected exports. The rupee weakened during the period, briefly nearing Rs 90 per dollar. Labour-intensive sectors such as textiles, apparel, jewellery, and agriculture have seen slower exports to the US.

Outlook for 2026

DSP describes 2025 as a transition year marked by slower earnings growth and tighter liquidity. For 2026, it expects gradual improvement supported by easier financial conditions, policy measures, and a low earnings base.

It sees opportunities across banks and NBFCs, selaect IT services, healthcare, power, and parts of the consumer sector, while stressing that investment outcomes will depend more on valuation discipline and business fundamentals than on macro forecasts.