Markets likely to hit new highs in 2026 after a well-balanced budget focused on capex and sustaining GDP growth

Naveen Kulkarni is the Chief Investment Officer at Axis Securities PMS

• Well-balanced budget with focus on capex spending and maintaining the GDP growth
• Markets to see new highs in 2026, rising in line with earnings growth
• Market could see even stronger journey in 2026 and FY2027 with receding global headwinds

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The unveiling of the Union Budget for 2027 by Finance Minister Nirmala Sitharaman has set off an immediate stir in the financial markets. Indian equity markets responded with caution, as benchmark indices declined by around 2 percent during the special trading session held on Sunday. One of the key reasons for the sharp correction has been a significant increase in security transaction taxes (STT) on futures and options. Apart from the increase in STT, markets appeared underwhelmed by the absence of any major growth-stimulating announcements.

That said, while the Budget was largely predictable and did not offer immediate excitement for investors, predictability itself is a positive from a long-term perspective. The recent sell-off has been more sentiment-driven, with concerns surrounding near-term FII selling this week. At its core, the changes in STT have no impact on the fundamental value of the underlying securities. The fundamental value of any company is driven by its operating metrics and profitability. The increase or decrease in STT on futures and options has no significant bearing on the fundamental value of the company’s share price. Thus, the correction led by changes in STT is likely to be short-lived on the broader market, and the panic selling could provide a good opportunity.

Now coming to the fundamentals of the Budget FY2027, clearly, it is a well-balanced budget with a focus on capex spending and maintaining the GDP growth trajectory. FY2026 has been a stable year as far as the GDP growth rate is concerned, and corporate earnings are picking up. The banking sector is in a very healthy position and generates a significant amount of cash profits, which will be ploughed back to generate a strong internal growth rate.

The top 500 companies rolling 4 quarters' profits have crossed Rs 16 lakh crore, which was around Rs 5 lakh crore in the pre-COVID era. This clearly indicates the underlying strength and provides solid fundamental groundwork for consistent earnings growth over the next decade.

Fiscal deficit for FY2026 at 4.4% and for FY2027 at 4.3% provide for a sound framework to bring down the debt-to-GDP ratio to under 50% by 2031. Apart from these factors, the capex push from the government remains consistent and in line with the nominal GDP growth rate, providing long-term multipliers for the economy. All these factors clearly point towards the economy growing at its trend line ~7%, which is solid in the global arena.

It is also important to note that the government’s assumptions of tax collections, nominal GDP growth rate, and divestment targets are conservative, which has pushed gross borrowing estimates a little higher, leading to rising bond yields. However, these challenges are likely to be short-lived as the core economic fundamentals are quite resilient and growth is likely to be very consistent.

Overall, the budget is in line with expectations and is positive. The near-term challenges of changes in tax structure on certain financial instruments do not have any significant impact on the economy or the underlying value of the securities. These factors will be resolved soon, and markets will see new highs in 2026, rising in line with earnings growth. If some of the global headwinds recede, we could see an even stronger stock market in 2026 and FY2027.