The ongoing earnings season has delivered encouraging results that are reshaping market sentiment, with earnings upgrades across nearly 50-60% of companies in the investment universe, according to IKIGAI Asset Manager's Pankaj Tibrewal. As reported by CNBC TV18, nearly 60% of companies that have reported results so far have delivered more than 15% earnings growth, significantly higher than the 45-55% range seen over the previous 12 quarters. The resilience has been visible across large-, mid- and small-cap companies, with earnings upgrades becoming increasingly broad-based rather than being confined to a handful of sectors. Improving monsoon conditions, a stable rupee, easing foreign investor concerns and strong high-frequency economic indicators have reduced many of the risks that had weighed on market sentiment a few months ago.
Pankaj Murarka, CEO and CIO of Renaissance Investment Managers, believes investors are entering a phase where quality businesses are likely to outperform as markets shift away from expensive growth stocks. According to reports from CNBC TV18, Murarka stated that 'quality has been beaten down and cash flows have been beaten down. Markets have been chasing growth, irrespective of or with a disregard for cash flows.' He emphasized that 'the value of a franchise or any business lies in cash flows,' arguing that companies generating consistent cash should regain favour after being ignored for the past 12 to 18 months. Murarka believes this shift is already visible, with investors rotating out of sectors that have delivered strong returns over the past several years, including industrials and defence which have become stretched valuations while earnings have started disappointing.
Tibrewal now expects private sector banks to play a bigger role in the next phase of the market rally, as reported by CNBC TV18. He believes that 'the next run up in the market, especially in the Nifty or the front indices, would happen from the private sector bank financials.' If FIIs start to slow down or turn buyers, the banking sector is very well poised, particularly private sector lenders. However, recent CLSA data reveals a significant shift in foreign investor sentiment toward banks, with FPIs reducing their relative weight in banks by 191 basis points during the June quarter, marking the first time in 11 years that overseas investors no longer held an overweight position in the banking sector. The reduction was led by HDFC Bank (56 basis points), Federal Bank (40 basis points), and ICICI Bank (27 basis points). Despite this foreign selling, Ashwini Agarwal, Founder & Partner at Demeter Advisors, expects the banking sector to remain one of the key beneficiaries with 'at least 15% to 18% earnings growth' expected.
Murarka identifies the IT sector as one of the biggest beneficiaries of the current rotation, contradicting fears that artificial intelligence would disrupt IT services companies. As reported by CNBC TV18, he believes 'AI is a tailwind for services companies because their TAM will expand significantly.' Murarka noted that 'global clients... cannot adopt and implement AI on their own,' and that the world's largest AI model developers launching their own services businesses only reinforces the need for IT services rather than replacing them. Recent CLSA data confirms this trend, with IT and healthcare sectors reaching record highs in terms of relative weight, while Infosys gained 29 basis points and Wipro added 11 basis points during the June quarter. While acknowledging that earnings growth in IT remains muted due to clients holding back discretionary spending amid macroeconomic uncertainty, he expects demand to resume gradually over the next two to four quarters.
Beyond financials and IT, Murarka continues to favour consumer discretionary businesses that generate strong cash flows, as reported by CNBC TV18. Companies in segments such as beverages and branded consumption have faced pressure from inflation and higher input costs, but he believes those challenges are easing while demand remains resilient. Many of these businesses are available at valuations last seen during previous market slowdowns, presenting attractive entry points for investors. He is equally optimistic about the long-term prospects of the automobile sector, particularly the electric vehicle ecosystem. Murarka believes EV adoption has reached an inflection point in two-wheelers and is set to accelerate in passenger vehicles over the next few years, making both vehicle manufacturers and component makers with meaningful EV exposure attractive investment opportunities. He also highlighted India's customer upgrade cycle, with more consumers moving from two-wheelers to entry-level cars, as another positive for the sector.
While market experts remain optimistic about India's banking and IT sectors, both analysts warn of significant global risks that could impact market performance. As reported by CNBC TV18, rising global interest rates and bond yields emerge as the biggest challenge for markets in the months ahead. Agarwal cautioned that 'rates are the real big risk on the horizon that we all need to watch out for on a global basis', with rising bond yields in the US and Japan, along with uncertainty over global interest rates, potentially influencing capital flows and valuations across markets. Additionally, oil prices remain an important risk due to continuing geopolitical tensions in the Middle East, which could impact broader market sentiment and investment flows into emerging markets like India.
