India's slowdown is unfolding amid the energy shock, and earnings downgrades are not over

Overview

This report is Goldman Sachs' weekly India equity outlook, with a core focus on changes in Indian activity, earnings expectations, fund flows, and sector performance amid the energy shock. The report notes that while reported Q1 earnings remain broadly better than expected, activity data has already cooled, corporate discussions about cost pressures from fuel, freight, chemicals, metals, plastics, and imported components are near 2022 levels, and the breadth of earnings downgrades is widening.

Core views

Goldman's core view is that India's slowdown has already begun, while market consensus remains too optimistic and may continue to be revised lower over the next few quarters. Consensus MSCI India CY26 EPS growth has already fallen from 16% before the shock to 14%, and Goldman expects it to decline further to around 8%. Small caps, domestic cyclicals, and manufacturing chains such as energy, chemicals, industrials, autos, and property are seeing the sharpest downgrades; IT, staples, and financials are comparatively more resilient.

Analysis framework

The report triangulates market performance, valuation, foreign and domestic fund flows, earnings revisions, high-frequency macro activity indicators, company feedback, and historical oil-shock experience. Activity indicators cover consumer confidence, auto sales, fuel demand, construction activity, steel production, port freight, and rail freight; earnings analysis covers about 90% of the disclosed MSCI India market cap.

Methodology notes

• Market strategyEarnings revision analysis

  Assess the direction of the earnings cycle by analyzing the ratio of analyst upgrades to downgrades and the trend in EPS benchmarks.

  The report shows MSCI India CY26 EPS has been revised down by about 3% since Feb. 27, with deeper cuts in small caps and commodity cyclicals, indicating that market earnings expectations are still in a downgrade cycle.

• Macro high-frequency trackingActivity data monitoring

  Use high-frequency indicators such as consumption, transportation, construction, and fuel demand to assess economic momentum.

  The report says urban and rural consumer sentiment fell to a 5- to 6-month low in April, while passenger vehicle sales, fuel demand, construction activity, steel production, and port freight all slowed to varying degrees.

• Fund flow analysisFII and DII fund flows

  Compare foreign and domestic institutional flows to assess the marginal source of market buying support.

  Foreign investors have remained net sellers year to date, while domestic institutions have stayed net buyers, showing that Indian equities are being supported mainly by local capital.

• Sector rotationDefensive versus cyclical relative allocation

  Compare earnings sensitivity between defensive sectors and cyclical sectors during cost shocks and demand softening.

  The report argues that materials and industrials typically see deeper downgrades during historical oil shocks, while IT, staples, and financials are relatively more resilient, which is why defensive sectors are preferred.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• NIFTY

  India's broad market index and the report's core target index

  Strengths

  Goldman expects it to reach 25,900 by March 2027, and continued domestic institutional inflows provide support.

  Weaknesses

  Earnings downgrades, cost inflation, and slowing activity data may cap upside.

  Comparison

  Performance was roughly flat this week, lagging the strength seen in some other Asian markets.

  Risks

  If CY26 EPS growth falls further to around 8%, the valuation premium could compress.

• MSCI India

  The valuation and earnings revision benchmark for Indian equities

  Strengths

  Reported Q1 earnings are still up about 9% year over year, with some companies beating expectations.

  Weaknesses

  The 12-month forward P/E is about 20.5x, roughly 60% above MXAPJ, while earnings expectations are being revised down.

  Comparison

  Valuation is higher than MXAPJ, but EPS revisions are weaker than the region, where MXAPJ EPS is about +17%.

  Risks

  High valuation combined with earnings downgrades makes the market more sensitive to negative macro and cost shocks.

• Energy, Chemicals, Industrials, Autos, and Property

  Cyclical and manufacturing sectors more exposed to the energy shock

  Strengths

  Some companies say price pass-through is still possible.

  Weaknesses

  Rising costs for fuel, freight, chemicals, metals, plastics, and imported components are driving the sharpest earnings downgrades.

  Comparison

  Commodity cyclicals have seen about -7% CY26 earnings revisions since Feb. 27, weaker than financials, defensives, and exporters.

  Risks

  If inflation persists, demand destruction risk rises and margins may remain under pressure.

• IT, Staples, Financials

  Relatively defensive sectors or sectors less affected by the oil shock

  Strengths

  They have historically been more resilient during oil shocks, and the report says IT, Staples, and Financials are relatively more robust.

  Weaknesses

  A broader market slowdown and valuation pressure could still affect performance.

  Comparison

  Earnings downgrades are milder than those for materials, industrials, and commodity cyclicals.

  Risks

  If the macro slowdown spills over into consumption and credit, defensive characteristics may also weaken.

• Indian equities fund flows

  The marginal impact of foreign and domestic capital on Indian equities

  Strengths

  DII net buying of about US$38bn year to date has provided important support to the market.

  Weaknesses

  FII net selling of about US$23bn year to date and global active funds' India exposure near a 20-year low versus benchmarks.

  Comparison

  Domestic money and foreign money are moving in opposite directions, creating a split in the flow picture.

  Risks

  If domestic inflows slow or foreign outflows widen, market absorption capacity could weaken.

Key data

• NIFTY weekly performanceflat w/wIT and Real Estate rose about 2% to 4%; FMCG and PSU banks fell about 0% to 2%.
• MSCI India valuation20.5x fP/EAbout a 60% premium to MXAPJ.
• FII fund flowsUS$-0.4bn wtd; US$-23bn YTDForeign investors were net sellers both this week and year to date.
• DII fund flowsUS$+1.1bn wtd; US$+38bn YTDDomestic institutions continued to buy net.
• MSCI India CY26 EPS revisionabout -3% since Feb 27thThe breadth of downgrades has widened, with cyclicals and mid/small caps hit more clearly.
• Consensus CY26 EPS growth14%, Goldman expects it to fall to around 8%It was previously 16%.
• Q1 profit growth+9% yoyBased on about 90% of disclosed MXIN market cap.
• Earnings beat magnitudeaverage +3%47% of companies beat expectations, while 34% missed.
• Non-financial revenue growth+13% yoyRevenue was strong, but margins were under pressure.
• Non-financial net margin8.9%Down 50bp year over year.
• Equities, bonds, commodities, FX, and rates monitoringCoverage of global markets, commodities, FX, and ratesThe report includes a summary of global asset performance.
• Target levelNIFTY 25,900 by Mar-2027Goldman forecasts this and prefers defensive sectors.

Impact & implications

For portfolios, the report conveys a dual slowdown signal from both earnings and macro momentum. Indian valuations remain elevated, while earnings estimates still carry further downside risk, implying a lower margin for error in the market. At the sector level, the energy and raw-material cost shock is more negative for manufacturing, commodity cyclicals, domestic cyclicals, small caps, and the property chain; IT, staples, and financials may remain relatively more stable. On the flow side, continued foreign outflows are being offset by domestic institutional inflows, which may support short-term market resilience, but if earnings downgrades continue to broaden, valuation premiums could come under pressure.

Risks

• A persistent energy shock could intensify cost inflation.
• Rising prices for fuel, freight, chemicals, metals, plastics, and imported components could erode margins.
• Demand destruction risk may rise, especially if companies continue raising prices.
• Earnings expectations for MSCI India and small caps may continue to be revised down.
• India's valuation premium to MXAPJ is already elevated, and earnings downgrades could trigger multiple compression.
• Continued foreign outflows could weaken market risk appetite.
• Activity indicators such as construction, steel, fuel, and transport could continue to soften.

What to watch

• Whether MSCI India CY26 EPS growth is revised down to around 8% over the next few quarters.
• The magnitude of earnings revisions in energy, chemicals, industrials, autos, and property.
• Whether non-financial net margins remain below 8.9% or face further pressure.
• High-frequency changes in fuel demand, passenger vehicle sales, construction activity, steel production, and port freight.
• Whether FII net selling continues and whether DII inflows can keep offsetting foreign outflows.
• Company conference call commentary on input costs, supply shortages, and price pass-through.
• Whether NIFTY can stay on Goldman Sachs' March 2027 target path toward 25,900.