Indian equity markets appear to be transitioning from a valuation-driven phase to an earnings-led phase, with recent corrections improving risk-reward dynamics for long-term investors. According to The Economic Times, Anil Rego, Managing Director & Chief Investment Officer at Right Horizons PMS, believes the worst of the valuation-led correction may be behind us, while Nifty earnings are expected to grow at around 12% CAGR through FY26-FY28E. The correction has already delivered a meaningful valuation reset, creating a healthier market where companies must earn their re-rating through actual earnings delivery rather than indiscriminate multiple expansion. Rego emphasizes that this earnings-led phase provides a reasonable fundamental foundation for the market, with the focus shifting towards businesses where earnings estimates can move ahead of consensus rather than those that simply look optically attractive due to falling multiples.
The first factor driving market optimism is credit growth, which has accelerated significantly from previous levels. As reported by CNBC TV18, credit growth has increased from around 9-10% last year to nearly 18% currently. Rego notes that India's banking system today is far healthier than it was in previous credit cycles, with stronger capitalisation and much better asset quality. The key positive is that household debt has risen to around 48% of GDP from about 35% a decade ago, but this rising financialisation is viewed as a natural feature of a developing economy rather than a systemic concern. The current situation does not represent a systemic balance-sheet risk, with the key being that underwriting remains disciplined and there are pockets of excess, particularly where unsecured credit has grown faster than underlying income. Rego continues to favour lenders with strong underwriting, diversified books and sustainable credit growth, with the winners being those that can compound through the cycle rather than simply maximise loan growth.
The second factor is the emerging recovery in consumer spending patterns, with Rego noting that consumption remains structurally underpenetrated as incomes rise and financialisation deepens. According to The Economic Times, the June quarter was affected by elevated commodity prices, currency depreciation and geopolitical disruptions, but some of these pressures are now easing, creating a better operating environment for the September quarter. SMIDs earnings have grown in late teens YoY, with earnings ex-OMC's beating expectations. This sustained improvement in consumption is particularly important for market outlook because it can feed into corporate earnings growth, with the combination of improving consumption with the other economic indicators giving confidence that the earnings cycle can strengthen significantly. The consumption opportunity is still structurally underpenetrated, with formal credit remaining a growth enabler provided underwriting remains disciplined.
Rego remains constructive on multiple sectors including financials, manufacturing & industrials, autos, power & renewable energy, and consumer discretionary. As reported by The Economic Times, he advocates a bottom-up approach to identify businesses where earnings growth is yet to be fully reflected in valuations. The focus is shifting towards businesses where earnings estimates can move ahead of consensus rather than simply buying after the market has already re-rated them. His approach emphasizes earnings growth + valuation + balance-sheet quality as the framework for investment decisions. Rego sees opportunities in semiconductors, electronics and digital infrastructure as longer-duration structural themes where India's manufacturing ecosystem is still at an early stage. He prefers businesses that can translate industry opportunities into sustained earnings compounding, with the current market becoming more interesting as the opportunity shifts from broad beta to differentiated alpha through bottom-up selection.
Foreign institutional investors are showing signs of turning around, with Rego noting that FIIs are already seeing a more interesting change in behaviour: their participation is broadening beyond traditional index heavyweights into a wider universe of mid- and small-cap companies. According to The Economic Times, India is already relatively under-owned after a prolonged period of foreign de-risking, and as global headwinds ease and the crowded AI trade normalises, India can become an important destination for the marginal global dollar. However, as reported by CNBC TV18, Raman Jauhar, Managing Director and Head of Equities at Axis Capital, expects the market to remain range-bound with 24,000 levels providing reasonable support. While foreign flows have improved with India seeing two consecutive months of positive flows, around 40% of foreign capital in August went towards primary markets compared to more than 50% in the previous month, which could limit the pace of Nifty's rise. Jauhar believes that improving earnings visibility, more reasonable valuations and currency stability would be the three key factors needed for FIIs to return decisively to Indian equities.
