According to DSP Mutual Fund's October Netra report, India's prolonged correction may be closer to a turning point after a sharp period of underperformance against emerging markets. The Nifty has corrected largely through time rather than a major price fall, spending 145 consecutive trading days below its 200-day moving average, making it the eighth-longest such stretch in the dataset. However, the maximum decline below the 200-DMA was only 11.5 percent, which DSP MF describes as a 'classic time correction' where the market has not seen a deep price collapse but has spent an extended period consolidating while underlying fundamentals catch up.
The bigger reset has been visible in India's relative performance against emerging markets. Between July 2025 and September 2026, the MSCI Emerging Markets index gained 39.3 percent in US dollar terms, while the Nifty declined 14.6 percent, creating a 53.9 percentage-point gap in returns between Indian equities and emerging markets. DSP MF noted that this correction through price, time and currency has improved the relative setup, while the extent of the divergence makes the current setup more favorable for mean reversion. The fund house believes this creates a rare divergence that could favor a reversal, though it doesn't mean a reversal is certain or imminent.
The valuation reset is most visible in large caps, with the Nifty 50 now trading closer to its historical norms. The index's trailing P/E ratio stands at 19.26x, below its historical median of 20.9x, while its P/B ratio is 2.75x, compared with a historical median of 3.5x. DSP MF therefore sees large caps as the more attractive part of the market, particularly when compared with mid- and small-cap stocks, where valuations remain elevated. Small-cap and mid-cap valuations relative to the Sensex are around 72 percent and 56 percent above their historical medians, respectively.
The valuation reset is also visible at the sector level, with IT, private banks and staples now trading at roughly the same forward valuation as cyclicals, compared with a historical premium of around 70 percent. DSP MF's sector analysis shows IT, private banks, FMCG, financial services, chemicals and cement near the bottom of their own historical return distributions, while CPSE, PSU banks, telecom and capital goods remain well above their historical base rates. This shift in sector valuations suggests that defensive sectors have lost their traditional premium, potentially creating opportunities in previously overvalued segments.
Despite current challenges, Bhatia expects India's earnings to positively surprise in the July-September quarter of 2026 (Q2FY27). According to the CNBC TV18 report, he did not provide a market-wide earnings estimate versus consensus but highlighted banking as one sector where the outlook is improving. The banking sector has been among the most beaten-down parts of the market, with Bhatia expecting margins to expand and stocks to re-rate over the next two years, even though there could be some near-term earnings pressure. He anticipates 'come 27, 28, next two years, banks will show good earnings'. Recent market data shows banks and non-banking financial companies, automobiles and manufacturing could report strong earnings in the second quarter, while the performance of IT services companies is likely to be shaped by artificial intelligence-related disruption and deal wins.
