India’s earnings recovery and returning capital flows provide support, but high valuations call for greater emphasis on value style

Overview

The report comprehensively assesses the Indian equity market’s weekly performance, RBI policy, corporate earnings, valuation styles, foreign and domestic fund flows, sector allocation, and macro risks. Market fundamentals have improved at the margin: earnings and revenue growth have accelerated, the earnings downgrade trend has stabilized, foreign inflows have reached an inflection point since mid-June, and domestic equity fund inflows have also rebounded. However, MSCI India’s forward P/E has reached 20.5x, representing an approximately 91% premium to Asia Pacific ex-Japan markets, increasing the importance of stock selection and valuation discipline.

Core views

First, corporate earnings were generally stronger than expected, with profit growth excluding commodities rising to 14% and revenue growth excluding financials and commodities reaching 17%, while financials, utilities, and consumer staples contributed more positive surprises. Second, CY26 earnings forecast downgrades have largely stabilized, with quarter-to-date EPS revisions broadly flat and utilities and financials seeing more notable upgrades. Third, the value style has shifted from lagging earlier to leading so far in the second half, with low-valuation stocks within industrials, real estate, utilities, energy, and financials performing particularly strongly. Fourth, short-term foreign fund flows have improved, and global active funds remain significantly underweight India, leaving room for future allocation increases; meanwhile, domestic fund inflows have rebounded, but cash positions have fallen to a five-year low. Fifth, the RBI kept policy rates unchanged, slightly lowered its inflation forecast and modestly raised its growth forecast, but weaker monsoon rainfall, reservoir storage, and agricultural activity warrant continued attention.

Analysis framework

The report uses a combined top-down and bottom-up approach: at the macro level, it tracks policy rates, growth, inflation, monsoon and agricultural indicators; at the market level, it compares index performance, valuations, style factors, market breadth, volatility, and derivatives positioning; at the fundamental level, it summarizes reported companies’ profits, revenues, margins, earnings surprises, and forecast revisions; at the funding level, it combines data on foreign investors, domestic mutual funds, SIPs, and global active fund allocations, and uses these to form index targets and sector allocation recommendations.

Methodology notes

• Earnings analysisMSCI India Earnings Tracker

  Tracking earnings reporting progress and earnings surprises

  Based on actual results from around 130 reported companies, covering approximately 87% of MSCI India index market capitalization, and comparing profits, revenues, margins, consensus expectations, and historical seasonal progress.

• Relative valuation12M Forward P/E Premium

  Forward P/E and cross-market premium comparison

  Uses MSCI India’s next-twelve-month P/E as a basis and compares it with MXAPJ and sector historical levels to assess valuation constraints and sector allocation attractiveness.

• Style investingLong/Short Style Monitor

  Long-short returns of styles such as value and growth

  Divides MSCI India constituents into quartiles by style characteristics and compares the returns of equal-weighted long-short portfolios between the highest and lowest quartiles to identify value style rotation.

• Fund flows and positioningFII and Fund Positioning Monitor

  Analysis of foreign investor, domestic fund, and global active fund positioning

  Combines NSDL, EPFR, and AMFI data to track foreign net buying and selling, sector rotation, global funds’ relative benchmark allocations, domestic equity fund inflows, and cash positions.

• Risk appetiteGS India Equity Risk Barometer (GSSRIERB)

  Composite risk appetite indicator for the Indian equity market

  Combines indicators such as foreign and domestic fund flows, fund positioning, futures open interest, ETF flows, volatility, and skew to assess where the market sits from risk aversion to risk appetite.

Asset mapping & comparison

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

• NIFTY

  Indian large-cap index, maintained at Marketweight

  Strengths

  Earnings growth is accelerating, domestic fund inflows are improving, and Goldman Sachs expects it to reach 26,500 points by June 2027.

  Weaknesses

  Overall valuations are elevated, and index gains depend more on earnings delivery.

  Comparison

  India’s allocation attractiveness relative to some Asian markets is constrained by its valuation premium.

  Risks

  Policy rate path, energy shocks, weaker monsoons, and changes in global risk appetite.

• MSCI India

  Benchmark for Indian market earnings and valuation analysis

  Strengths

  Profits excluding commodities grew 14% YoY, while revenue growth and earnings surprise breadth both improved.

  Weaknesses

  The forward P/E is 20.5x, leaving a limited valuation margin of safety.

  Comparison

  The forward P/E premium to MXAPJ is approximately 91%.

  Risks

  If earnings forecasts are downgraded again, high valuations could amplify drawdowns.

• Banks, energy, utilities

  Overweight sectors

  Strengths

  Banks and utilities saw more positive earnings surprises and EPS upgrades, while energy valuations are relatively low.

  Weaknesses

  Banks are affected by interest rates and the credit cycle, while energy and utilities are affected by policy and raw material prices.

  Comparison

  Compared with high-valuation growth sectors, the combination of earnings revisions and valuations is more attractive.

  Risks

  Deterioration in asset quality, regulatory changes, oil price or energy supply shocks.

• TMT, defense

  Overweight sectors

  Strengths

  They have relatively high structural growth potential, with strong expected earnings growth from CY26 to CY27.

  Weaknesses

  Valuations are relatively high, with TMT forward P/E at around 41x and defense around 39x.

  Comparison

  Growth expectations are better than most traditional sectors, but valuation sensitivity is also higher.

  Risks

  Earnings delivery falling short of expectations, order delays, and valuation compression.

• Information technology, healthcare

  Underweight sectors

  Strengths

  They have export exposure and long-term structural demand.

  Weaknesses

  Recent earnings growth or valuation risk-reward is insufficient to support a higher allocation.

  Comparison

  Compared with sectors such as financials and utilities, the combination of earnings revisions and valuations is weaker.

  Risks

  Global demand slowdown, currency changes, regulatory and pricing pressure.

• Indian low-valuation stocks

  Value style preference

  Strengths

  So far in the second half, the value style has strengthened relative to growth, and stocks with lower starting valuations have generally delivered better returns.

  Weaknesses

  Some low valuations may reflect earnings quality or cyclical risks.

  Comparison

  Low-valuation stocks within industrials, real estate, utilities, energy, and financials outperformed high-valuation stocks.

  Risks

  If liquidity again chases high-growth assets, the value rotation may reverse.

Key data

• NIFTY weekly performance+1%State-owned banks and metals rose 4% to 5%, while real estate fell 2%.
• RBI policy rate5.25%The policy rate was kept unchanged; the inflation forecast was slightly lowered and the growth forecast modestly raised.
• Reported company coverage130 companies, covering 87% of MSCI India market capitalizationCorresponding to 1QFY27 or 2QCY26 results.
• Profit growth excluding commodities+14% YoYReached a six-quarter high and was broadly flat sequentially.
• Revenue growth excluding financials and commodities+17% YoYReached a three-year high.
• Margin change-70 bps QoQExcluding financials and commodities, margins remained resilient despite energy supply shocks.
• Earnings surprise distribution45% beat expectations, 37% missed expectationsThe average earnings surprise was approximately positive 2%.
• Six-month profit completionApproximately 47% of full-year CY26 forecastsAbout 1 percentage point below the historical average.
• MSCI India forward P/E20.5xApproximately 91% premium to MXAPJ.
• Foreign investor flowsNet buying of USD 1.2 billion so far this weekYear-to-date net outflows still stand at USD 25 billion, with flows improving since mid-June.
• Domestic equity fund inflowsUSD 3.1 billion in June 2026Up 27% MoM.
• SIP inflowsUSD 3.4 billionUp 3% MoM.
• Global active fund allocation to IndiaUnderweight by 190 bpsTotal assets under management are approximately USD 1.45 trillion, with actual India allocation at 2.4% versus a benchmark weight of 4.3%.
• Monsoon rainfall11% below normalReservoir storage is also 3% below normal.
• NIFTY target26,500 pointsThe target date is June 2027.

Impact & implications

The earnings recovery, stabilization in forecast downgrades, and improvement in fund flows help reduce near-term downside pressure on Indian equities and provide relative advantages for sectors with stronger earnings and valuation support, such as financials, utilities, and energy. Since overall valuations remain significantly higher than regional markets, index-level return potential depends more on earnings delivery than on continued valuation expansion. Therefore, the strategy should maintain a neutral allocation to the Indian market while favoring sectors with lower valuations, stable or upward earnings revisions, and avoiding paying excessive valuations for high-growth expectations.

Risks

• MSCI India’s forward P/E is 20.5x, approximately a 91% premium to MXAPJ, and high valuations may limit index returns and amplify the impact of earnings shortfalls.
• Foreign investors have still posted year-to-date net outflows of around USD 25 billion, and the recent improvement has not yet fully reversed the full-year weakness.
• Monsoon rainfall is 11% below normal, reservoir storage is 3% lower, and summer crop sowing and tractor sales are also weak, which could affect rural demand and food inflation.
• Energy supply shocks have already caused margins for non-financial, non-commodity companies to contract by 70 bps QoQ; if the shocks persist, margin pressure may intensify.
• Current six-month profits have reached only about 47% of full-year CY26 forecasts, around 1 percentage point below the historical average, leaving risks to full-year earnings delivery.
• Domestic fund cash positions have fallen to a five-year low of 3.1%, reducing the liquidity buffer available for subsequent increases in holdings.
• Although expectations for future RBI rate hikes have been pushed back by two months, there remains risk of an upward policy rate path from CY26 to CY27.

What to watch

• Whether the share of earnings beats, revenue growth, and margins can continue to improve in subsequent earnings reports.
• Whether CY26 and CY27 EPS forecasts shift from stable to sustained upgrades.
• Whether foreign inflows can continue and whether they remain concentrated in consumer discretionary and financials.
• Whether global active funds’ underweight to India, near long-term lows, begins to be covered.
• Whether the value style’s lead over the growth style can continue.
• Further RBI guidance on inflation, growth, and the policy rate path.
• Monsoon rainfall, reservoir storage, summer crop sowing, and rural demand indicators.
• Whether domestic equity fund and SIP inflows maintain growth, and the impact of low fund cash positions on incremental buying.
• Earnings delivery and valuation changes as NIFTY moves toward the June 2027 target of 26,500 points.