Are Indian Stock Markets Benefiting from Long-Term Growth?

Mumbai, Aug 19 (NationPress) The Indian equity markets are experiencing significant long-term growth advantages, although they face certain short-term valuation challenges, according to a report released on Tuesday.

"The domestic stock market is entering FY26 facing cyclical challenges yet supported by robust structural factors," stated Enquirus Securities in its analysis.

"We are optimistic about sectors such as auto, capital markets, cement, FMCG, infrastructure, internet platforms, NBFC, and oil & gas, while we advise caution on building materials, industrials and defense, real estate, textiles, and logistics sectors,” remarked Maulik Patel, Head of Research at Equirus Securities.

The research firm has maintained a neutral stance regarding banks, chemicals, consumer durables, EMS, IT services, metals and mining, healthcare, and retail sectors.

In its findings, the brokerage expressed caution regarding small-cap stocks, noting that the small-cap forward P/E ratio is currently at 1.25 times, compared to a long-term average of 0.88 times, which is just below the peak of 1.3 times. Meanwhile, the Nifty 50 index is trading above its 10-year average.

Mid-cap stocks remain elevated but are projected to have better earnings visibility than small-caps, where valuation expansion is prevalent, as highlighted in the report.

"With CY25 EPS forecasts declining by (-)13.8 percent, the largest reduction since the pandemic, it’s crucial to invest wisely based on thorough research for optimal performance," Patel added.

In the near term, leadership is expected to transition toward large-caps and high-quality mid-caps as valuations and earnings forecasts re-adjust.

"Large-caps offer the best margin of safety, while mid-caps should be approached carefully in areas of structural growth, and small-caps require caution until earnings catch up," according to the report.

The analysis also noted a definitive recovery in rural consumption trends. After years of stagnation or decline, rural wages have been steadily increasing since late 2024, with February-May 2025 showing the strongest year-on-year increases since 2018 (overall rural wages rose by +3.5 percent in May 2025).

This growth in wages directly enhances rural disposable income.

With CPI inflation dropping below 4 percent, liquidity has surged into surplus, and the RBI has initiated a gradual rate-cut cycle.

"Historically, such easing results in modest short-term returns but significantly stronger gains over 12 months when macroeconomic conditions are favorable, which supports a balanced approach between cyclicals (financials, industrials) and defensives (consumer staples, healthcare)," the report noted.

Furthermore, domestic institutional investors (DIIs) have now overtaken foreign institutional investors (FIIs) in equity ownership, bolstered by substantial SIP inflows (over 27 percent CAGR FY17-FY25), creating a stable domestic demand foundation.

Increased domestic participation absorbs FII selling, mitigating market sensitivity to global risk-off scenarios, which is a consistent positive for valuation stability, the report concluded.