A recent Reuters poll, conducted between May 15-27 among 24 analysts, projects that India's benchmark stock market indices, the Sensex and Nifty, are likely to deliver negative returns in 2026. This forecast suggests a challenging year for Indian equities, with the Nifty 50 potentially recording its first annual decline since 2015.
Key Factors Driving Negative Outlook
Several critical factors are contributing to this pessimistic outlook. Analysts point to persistent foreign fund outflows, elevated market valuations, and India's limited participation in the global rally driven by artificial intelligence (AI) as primary concerns.
Emkay Global noted that the market appears to be pricing in a post-war normalization in estimates. However, continued global hostilities and disruptions could put further pressure on earnings and valuation assumptions.
FPI Outflows and Relative Attractiveness
Kotak Institutional Equities expects Foreign Portfolio Investor (FPI) flows to remain subdued. They highlight India's diminished attractiveness compared to other emerging markets (EMs) due to several reasons:
- Weaker relative FY2027E earnings growth in terms of both quality and quantity.
- 'Negative' exposure to the ongoing AI and semiconductor cycle, which is anticipated to continue for another 1-3 years.
- 'Negative' exposure to commodities, particularly crude oil and natural gas, where other EM markets offer higher exposure.
Kotak emphasized that the sustained large FPI outflows from Indian equity markets reflect a steady deterioration of relative returns amidst a compression of relative earnings growth expectations.
Domestic Economy and External Pressures
JM Financial observed selective resilience within the domestic economy, citing strong auto demand, accelerating credit growth, and stabilizing mutual fund flows. However, infrastructure ordering continues to contract, consumer sentiment has softened, and commodity input costs have intensified.
Externally, a recent spike in US bond yields presents a headwind for Indian markets. While hopes of a US-Iran peace deal have pulled crude prices back, structural pressure on India's external account is expected to persist.
Specific Projections for 2026
The Reuters poll projects the Nifty 50, currently down about 8.5 percent in 2026, to end the year at 26,000, implying an annual decline of approximately 0.5 percent. The Sensex is forecast to close 2026 at 84,150.
A Contrasting View
Earlier this month, Morgan Stanley offered a more optimistic perspective, setting a Sensex target of 89,000. Their assumptions include a continuation of India's gains in macro stability, increased private investment, and a positive gap between real growth and real rates. They also factored in robust domestic and global growth, lower oil prices from current levels, and a benign monetary policy. Morgan Stanley anticipates Sensex earnings to compound at 16 percent annually through F2029.
"The continued large FPI outflows from Indian equity markets reflect the steady deterioration of relative returns amid continued compression of relative earnings growth expectations," stated Kotak Institutional Equities in their strategy note.