Direct Equities: Market consolidation amid valuation concerns

Near-term challenges remain, but we stay positive on the consumption recovery, supported by multiple fiscal and monetary measures as next internal growth driver GST 2.0 was finalized on 5-Sep-25. Short-term volatility likely to persist due to ongoing tariff pressure, earnings concerns, and foreign outflows. We expect market to remains rangebound and recover in H2FY26. We expect sideways-to-mildly-positive returns over the quarter, but the rally could be broad based.

Highlights

• New tariffs on US trade and lack of visibility added to the weakness. With the US accounting for ~20% of India’s export market (~2% of GDP), this will impact export-reliant sectors like textiles, gems, footwear, and energy.
• Domestic Institutional Investors (DIIs) remain steadfast buyers with USD 10.9bn worth buying in Aug and USD 59.6bn worth buying CYTD.
• Bloomberg data pegs consensus earnings growth forecast for Nifty-50/BSE-500 at 4%/3% for FY26 (vs. 2%/6% YoY earnings growth in FY25), 17%/18% for FY27.
• Sectors: (1) BFSI & IT offer favorable risk-reward balance (2) Selective plays in Metals, Chemicals and Realty-proxy sectors (3) Potential tactical plays - Media, Auto and Telecom (4) On the sidelines – US-export exposed manufacturing/pharma/textiles on the back of growth uncertainty and industrials and infra due to scope of deceleration in earnings.