MOFSL expects 22% earnings growth across its coverage universe and 27% for the Nifty-50 in Q2FY27, but elevated energy prices, foreign outflows and global uncertainty could keep the market under pressure

Indian equities could be entering an important earnings-recovery phase, but the road ahead is unlikely to be easy. Motilal Oswal Financial Services (MOFSL), in its latest India Strategy report, expects corporate earnings to accelerate sharply in Q2FY27, offering a potential fundamental support to the market even as global risks remain elevated.

MOFSL expects earnings for the 399 companies in its coverage universe to increase 22 per cent year-on-year in Q2FY27, which would mark the strongest growth in 11 quarters. For the Nifty-50, earnings growth is projected at 27 per cent, potentially making it the strongest earnings-growth quarter in 17 quarters.

The recovery, however, is taking place against a difficult backdrop of elevated energy prices, higher global bond yields, geopolitical uncertainty and continued foreign investor selling.

Earnings Recovery Could Be the Biggest Positive

The expected earnings improvement is notable because India's equity market has spent the past several quarters dealing with uneven corporate profit growth.

MOFSL expects the Q2FY27 recovery to be relatively broad-based. Profit after tax is projected to rise 23 per cent for large-cap companies, 11 per cent for mid-caps and 29 per cent for small-caps.

Sales growth is expected at 19 per cent for large-caps, 20 per cent for mid-caps and 17 per cent for small-caps, while EBITDA growth is estimated at 18 per cent, 9 per cent and 16 per cent, respectively.

The combination of stronger sales and operating profit growth suggests that the earnings cycle could be moving beyond the weak-growth phase seen across several sectors.

Financials Expected to Lead the Recovery

Financial companies are expected to remain one of the biggest pillars of the earnings recovery.

MOFSL expects private banks to report 24 per cent profit growth in Q2FY27, while PSU banks are projected to deliver 27 per cent growth. NBFCs are also expected to contribute significantly.

The financial sector could benefit from a combination of healthy credit growth, improving asset quality, controlled credit costs and relatively resilient domestic demand.

The expected improvement is important for the broader market because banks and financial services companies have a substantial weight in major Indian equity indices.

Metals, Telecom and Oil & Gas Add to Earnings Momentum

The earnings recovery is not limited to financials.

MOFSL expects metals earnings to increase 44 per cent in Q2FY27, while oil and gas companies excluding oil marketing companies are expected to report 34 per cent growth.

Telecom is projected to deliver an especially strong 71 per cent increase in earnings.

The broad-based nature of the expected recovery is one of the more encouraging elements of the report. If multiple sectors deliver earnings growth simultaneously, the market could receive stronger fundamental support even without a major expansion in valuation multiples.

India Has an FII Problem, But Not a Domestic Liquidity Problem

One of the biggest differences between India's current market environment and earlier periods of foreign selling is the strength of domestic institutional flows.

Foreign institutional investors have continued to withdraw money from the secondary market amid global uncertainty, higher interest rates and the concentration of international capital in artificial-intelligence-related trades.

Domestic institutional investors, however, have absorbed a substantial portion of the selling.

MOFSL estimates that DIIs invested around $18 billion in Indian equities between July and September 2026, compared with only around $0.7 billion from FIIs.

Strong monthly systematic investment plan contributions of more than $3 billion, along with continued retail participation, have provided an important cushion for the domestic market.

Long-Term Capital Shift Is Becoming More Visible

The changing balance between foreign and domestic capital is also visible over a longer period.

According to MOFSL's assessment, FIIs have cumulatively withdrawn around $3 billion from India's secondary market over the past decade, while investing roughly $71 billion in the primary market.

This suggests that global investors have not necessarily abandoned India's growth story. Instead, their preference may increasingly be shifting towards specific new-age companies and growth opportunities rather than broad exposure to conventional large-cap stocks.

This distinction is important because it indicates that foreign capital could return selectively even if broad-based FII flows remain volatile.

Indian Equities Are Less Expensive Than Two Years Ago

Another important factor highlighted by MOFSL is the change in valuations.

The Nifty-50 has declined around 14 per cent from its September 2024 peak, while the Nifty Midcap-150 and Nifty Smallcap-250 have declined around 2 per cent and 3 per cent, respectively.

On a 12-month forward price-to-earnings basis, large-cap and mid-cap valuations have fallen 31 per cent and 36 per cent from their September 2024 peaks. Small-cap valuations have corrected by around 7 per cent.

The Nifty-50 is now trading approximately 18 per cent below its long-period average valuation, while the mid-cap index is around 4 per cent below its average.

Small-caps, however, remain around 24 per cent above their long-period average, suggesting that valuation risks have not disappeared across the market.

India’s Valuation Premium Over Emerging Markets Narrows

India's valuation premium over emerging markets has also moderated substantially.

The premium stood at around 35 per cent in September 2026, compared with a long-term average of 72 per cent and a peak of 147 per cent in 2022.

This represents a significant change in the market's valuation equation.

While Indian equities are still not inexpensive across all segments, the valuation gap has narrowed considerably. Stronger earnings growth could therefore play a greater role in supporting stock prices than simply relying on multiple expansion.

The Market Is Moving Towards Stock-Specific Opportunities

MOFSL's assessment does not suggest that investors should buy the entire market indiscriminately.

Instead, the brokerage expects the next phase to be increasingly bottom-up, with stock selection becoming more important.

Emerging themes such as manufacturing, capital goods, defence, electronics manufacturing services, data centres and new-age internet businesses have attracted increasing investor interest.

At the same time, some traditional heavyweight segments, including parts of auto, banking, consumer, IT services, oil and gas and utilities, have seen comparatively weaker investor interest.

This divergence could create a market in which earnings delivery becomes a more important driver of individual stock performance.

Mid- and Small-Caps Regain Strategic Importance

MOFSL has increased the allocation to mid- and small-cap companies in its model portfolio, shifting around 400 basis points of portfolio weight away from large-caps.

The brokerage remains overweight on diversified financials, automobiles, new-age technology platforms, manufacturing and industrials, along with consumer discretionary businesses.

Within manufacturing, defence and EMS remain preferred areas.

The strategy reflects a belief that India's next phase of economic expansion could generate more opportunities among companies linked to domestic manufacturing, digitalisation, infrastructure and discretionary consumption.

Earnings Growth Could Continue Into FY28

The expected improvement is not limited to Q2FY27.

MOFSL projects PAT growth of around 15 per cent for its broader universe in FY27, followed by 17 per cent growth in FY28.

For the Nifty-50, PAT growth is estimated at 17 per cent in FY27 and 13 per cent in FY28.

Financials, metals, telecom and automobiles are expected to be the biggest contributors to incremental earnings in FY27. Together, these sectors are expected to account for approximately 78 per cent of the incremental earnings of the MOFSL universe.

The sustainability of this earnings trajectory will therefore be crucial for the broader market.

Five Risks Could Derail the Recovery

Despite the optimistic earnings outlook, MOFSL identifies several risks that could prevent a sustained market recovery.

The first is the direction of global interest rates and capital flows. Higher global bond yields could make fixed-income investments increasingly attractive relative to emerging-market equities.

The second is energy prices. Elevated crude oil prices could increase India's import bill, put pressure on inflation and raise input costs for companies.

The third is the sustainability of the AI-led investment cycle. A sharp reversal in global technology stocks could affect international risk appetite and emerging-market flows.

The fourth is continued FII selling. Strong domestic liquidity can absorb some foreign selling, but sustained outflows could continue to limit the upside in benchmark indices.

The fifth is the supply of new equity. A large IPO pipeline and corporate fundraising could absorb domestic liquidity and potentially reduce the amount of capital available for secondary-market stocks.

Crude Oil and Bond Yields Remain Critical

Energy prices could be particularly important for India's market outlook.

Higher crude prices can increase transportation and manufacturing costs while simultaneously putting pressure on inflation and the country's external balance.

If elevated crude prices persist, the expected improvement in corporate margins could be affected in sectors with high energy intensity.

Global bond yields are another critical variable. Higher yields can increase the opportunity cost of holding emerging-market equities and may encourage global investors to remain cautious on markets such as India.

Domestic Liquidity Could Remain the Market’s Cushion

Despite the external risks, India's strong domestic savings and investment ecosystem provides an important stabilising force.

Continued SIP inflows, rising retail participation and strong DII investment can help absorb foreign selling and reduce the market's dependence on overseas capital.

However, the size of the IPO pipeline will determine how effectively this liquidity continues to support secondary markets.

If primary-market fundraising becomes too large, domestic liquidity could be diverted away from listed stocks, limiting the upside even when corporate earnings improve.

Market Outlook

The Indian equity market appears to be approaching an important transition point. After a prolonged period of uneven earnings and valuation concerns, Q2FY27 could provide evidence that the corporate earnings cycle is finally turning higher.

A projected 27 per cent earnings growth for the Nifty-50 and 22 per cent growth across MOFSL's broader coverage universe provide a strong fundamental backdrop. The expected improvement across financials, metals, telecom and other sectors further strengthens the case for a recovery.

However, earnings growth alone may not be enough to trigger a broad-based rally. Crude oil prices, global bond yields, FII flows, geopolitical risks and the IPO pipeline could continue to create volatility.

For investors, the environment increasingly favours earnings-led stock selection rather than indiscriminate market exposure. Companies capable of delivering sustainable revenue growth, margin expansion and strong cash flows could attract greater investor attention.

The key message from the current setup is clear: India's earnings engine may be restarting, but the market still faces a heavy lift from global risks. The next phase is likely to reward companies that can deliver actual earnings rather than those relying solely on valuation expansion.