With the India–US trade deal easing tariff pressures, FII flows showing early signs of return, and corporate earnings indicating gradual stabilisation, investors are recalibrating their strategies for 2026.
In this edition of ETMarkets Smart Talk, Siddhartha Khemka, Head of Research – Wealth Management at Motilal Oswal Financial Services, shares why the small- and midcap space could remain opportunity-rich — but only for those willing to be selective.
He highlights the importance of earnings visibility, balance-sheet strength and structural growth themes over pure momentum plays, while also outlining the broader triggers that could shape market direction in the months ahead. Edited Excerpts –
Q) We have seen a rollercoaster ride in markets with wild swings post-Budget. How do you see markets in the near term?
A) Indian equities saw sharp swings through early February, with markets correcting on 1st Feb after the Budget-led STT hike triggered a sell-off, stabilising on 2nd Feb amid selective dip-buying, and then staging a powerful rebound on 3rd Feb as optimism around the India-US trade deal drove a broad-based risk-on rally and strong short covering.
With the trade uncertainty now being lifted, we believe that multiple positives will accrue in the form of 1) reversal of FII outflows, 2) INR recovering its lost ground, 3) general improvement in sentiments towards Indian equities, 4) return of confidence for FDI, and 5) retracement of India’s underperformance vs EM peers.
The US agreed to reduce the reciprocal tariff on Indian imports from 25% to 18% and fully withdraw the additional 25% punitive levy linked to Indo-Russian oil trade, implying a sharp 32% point reduction in the overall tariff burden.India’s tariff rate now stands below several key Asian peers, materially enhancing the competitiveness of its exports to the US. This is likely to support market sentiment, with a multi-layered positive impact on the economy and export-facing sectors.
Following the deal announcement and clarity on the fine print, we expect markets to increasingly recognise the improving trend in corporate earnings, supported by steady upgrades and sequential growth, which should help sustain positive momentum in the near term.
Q) With the Budget, trade deal and MPC out of the way, what are the next big triggers that D-Street investors can look forward to?
A) With several key events largely behind us, markets are likely to transition into an earnings- and liquidity-driven phase. Near-term triggers include trends in FII flows, earnings commentary and key high-frequency indicators such as GST collections, PMI readings (manufacturing and services), auto sales amongst others that signal demand momentum.
Progress on the execution of recently announced trade agreements with the US, and EU, could emerge as an incremental catalyst, as clarity on tariffs, market access and supply-chain realignment may improve export visibility and corporate capex sentiment.
Globally, the trajectory of US rates, bond yields, and AI-led tech spending will remain crucial for risk appetite, while crude oil trends and China’s macro outlook could influence commodities and inflation expectations.
Overall, market direction should increasingly be guided by earnings delivery, global trade and liquidity conditions.
Q) What is your take on the December quarter earnings, which have come through? Are we seeing green shoots?
A) As of 2nd Feb’26, 199/31 companies within the MOFSL Universe/Nifty have announced their 3QFY26 results. The earnings of the aforesaid MOFSL Universe companies/Nifty companies grew 14% YoY (in line with our estimate of 13% YoY) and 7% YoY (vs. our est. of +8% YoY) respectively in 3QFY26.
Overall earnings growth was driven by Metals, which grew 59% YoY; Oil & Gas rose 15%; BFSI grew 8%; Technology rose 12%, and Automobiles increased 18%.
While the quarter was not uniformly strong, it indicated earnings stabilisation, with early green shoots in segments such as banking, metals, industrials, logistics, where volumes and margin trends have steadied after headwinds.
The moderation in cost pressures and signs of volume recovery in key sectors reflect improving demand dynamics. While growth remains gradual, the trend is constructive — especially as sectors with stable balance sheets show resilience.
Increasing clarity on order books, capex plans and consumption metrics provide a better measure of the broad earnings health.
Overall, the quarter suggests a stabilising earnings backdrop, where companies with strong fundamentals and clear earnings visibility are likely to command a premium.
Q) Which sectors are likely to remain in the limelight in 2026, post-Budget, trade deal, etc.?
A) Post the Budget and recent trade developments, sectoral leadership in 2026 is likely to be driven by policy continuity, export tailwinds and a gradual recovery in domestic demand.
The US-India trade deal is expected to have a multi-layered positive impact on the economy and export-oriented sectors. Auto ancillaries, defence, textiles, EMS, consumer durables, gems and jewellery and utilities are likely to be key beneficiaries, while financials could see second-order gains through improved growth visibility.
Meanwhile, under the Union Budget, policy thrust remains firmly tilted toward public capex, with capital expenditure budgeted to rise 11.5% YoY to INR12.2t in FY27E, supporting sectors leveraged to the investment cycle.
Therefore, Capital goods, infrastructure and industrials should remain in focus amid strong execution visibility and sustained government capex. A key highlight was the government’s intent to attract global investment into data centres, which could drive incremental opportunities across digital infrastructure and utilities.
Financials may see steady traction supported by healthy credit growth and stable asset quality, alongside tactical opportunities in capital-market-linked businesses.
Further, pharma and specialty chemicals may remain in the limelight as trade agreements and supply-chain diversification improve export prospects.
Q) How should one play the small & midcap theme this year?
A) The small and midcap theme in 2026 is likely to remain opportunity-rich but increasingly selective, with earnings visibility and balance-sheet strength becoming more important than momentum.
Investors may prefer quality midcaps with strong order books, cash-flow visibility and exposure to structural themes such as manufacturing, capex and exports, while being cautious on crowded pockets where valuations remain elevated.
Given the potential for intermittent consolidation and sector rotation, staggered allocations could be more effective than aggressive positioning. A balanced approach combining selective SMIDs with relatively better-valued large caps may help manage volatility while retaining growth exposure.
Q) How are we placed in terms of valuation among other EM players?
A) As of Feb’26, Indian equities continue to trade at a structural premium to most EM peers, though valuations have moderated meaningfully after the recent consolidation.
The Nifty50 now trades closer to its long-term average of 20.9x, while the valuation gap between MSCI India and broader EM indices has narrowed from peak levels.
Relative to markets such as China, Korea and parts of ASEAN, India remains premium-valued, supported by stronger earnings visibility, domestic liquidity and macro stability.
We believe markets are approaching a valuation inflection rather than a decisive reversal — with improving earnings trends, policy clarity and gradual return of FII flows providing a constructive backdrop.
Q) How are FIIs looking at India? We are seeing some buying coming back towards Indian equities.
A) FII sentiment toward India appears to be gradually improving, with flows turning more constructive following the India-US trade deal announcement and greater clarity on policy risks.
The FIIs have turned net buyers in February so far (up till 10th Feb) after persistently selling for the past seven months. The reduction in tariff uncertainty, coupled with India’s relatively resilient earnings outlook and macro stability, has helped restore confidence among global investors.
While positioning remains selective, FIIs are increasingly viewing India as a structural growth market within emerging markets, supported by steady earnings visibility and improving export competitiveness. Further, any stability in global rates and currency trends could further accelerate inflows.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
