Benchmark indices may have remained in consolidation mode over the past few months, but strong earnings growth in the broader market continues to keep medium- to long-term opportunities intact, according to Ankit Patel, Co-founder & Partner at Arunasset Investment Services.
“Consolidation has removed excesses, especially in the broader market. In terms of index valuations, we’re broadly close to historical averages,” Patel said. “The earnings growth, however in the small and midcap space is in our view going to beat expectations.”
He said the Nifty Midcap 150 and Nifty Smallcap 250 delivered close to 30 per cent y-o-y EPS growth in Q4, while brokerage estimates are factoring in over 25 per cent earnings growth for smaller companies in FY27. He added that actively managed and concentrated strategies are likely to outperform as opportunities remain increasingly stock-specific rather than index-driven.
Midcaps rally on earnings support
Patel said the rally in the Nifty Midcap 100 has largely been earnings-led rather than purely valuation-driven.
“The PE has risen sharply but the denominator E has also supported,” Patel said. “Q4 results show this clearly. Midcap earnings growth has been around 30 per cent year-on-year, which gives the rally a stronger fundamental base.”
He added that concentrated and actively managed strategies such as PMS products and actively managed small- and mid-cap funds are likely to outperform over the medium term.
Domestic investors continue to support markets
Strong domestic institutional investor (DII) participation has been one of the biggest drivers of market resilience, Patel said.
According to him, DIIs bought ₹2.09 lakh crore worth of equities during the October-December 2025 quarter, averaging nearly ₹70,000 crore per month. Following the February 28 market correction, DIIs turned even more aggressive and bought ₹1.43 lakh crore in March alone.
“This shows that large domestic investors did not panic when uncertainty spiked; they used the correction to deploy capital,” Patel said.
He added that DII buying moderated to ₹51,064 crore in April after markets rebounded sharply, with the Nifty 50 rising 7.5 per cent, the Nifty Midcap 100 gaining 13.6 per cent and the Nifty Smallcap 100 advancing 18.4 per cent during the month.
“This suggests investors were aggressive when prices were lower and more measured after the rebound,” Patel said.
FPI sentiment may improve on earnings recovery
Sustained earnings recovery could eventually reverse FPI outflows from Indian equities. FPIs have withdrawn over ₹2.2 lakh crore from Indian equities in the first five months of 2026 amid concerns around slowing earnings growth and elevated valuations.
“FPIs will come back when earnings come back,” Patel said. “If we get one more strong quarter, FPIs will have to reassess India.”
He added that Q3 earnings growth in the small- and mid-cap space was around 25 per cent y-o-y, while Q4 growth improved further to nearly 30 per cent y-o-y.
“In my view, the worst of FPI selling is likely behind us,” he said.
Weak monsoon remains a key risk
On the monsoon outlook, Patel said an average or slightly weak monsoon would be manageable for the economy unless rainfall distribution turns adverse.
He said prolonged dry spells in key agricultural regions could push up food inflation and impact rural consumption across sectors such as tractors, two-wheelers, FMCG and rural credit.
“For markets, the first reaction may be sentiment-driven. But unless the monsoon is meaningfully deficient, earnings and liquidity will matter more.”
“A normal-to-average monsoon will be neutral; a badly distributed monsoon will be negative for rural demand and inflation sentiment,” Patel said.