From the market perspective, the dominant feature of the year 2025 turned out to be India’s underperformance. While 2025 was a very good year for stock markets globally, India underperformed. The rallies in large developed markets and in most emerging markets were impressive. The YTD returns as on 20th December 2025 are as follows: S&P 500 (16.4%), Nasdaq (20.89%) Nikkei (25.95%) Euro Stoxx 50 (17.13%), Kospi (67.60%), SSE (19.25%), TAIEX (21.30%). In sharp contrast, Nifty delivered only 9.36% return. However, when we look at the market from a five-year perspective, the picture completely changes: During the five-year period from 20th December 2020 to 20th December 2025, India has been the second-best performing market in the world, second only to Taiwan. Also, it is important to understand the fact that during the last 20 years, India along with the US has been the best performing market in the world. Investors should understand that it is this long-term consistent performance that leads to impressive wealth creation. It is the long-term consistent performance that matters, not the outperformance or underperformance in a year.
The dominant market theme of 2025 has been the sparkling AI trade. ‘AI gainers’ like the US, China, South Korea, and Taiwan gained from the boom in AI trade. India, an AI loser, didn’t participate in the AI boom.
A likely threat to global equity markets in 2026 might come from a potential bursting of the ‘AI bubble’. About 45% of fund managers surveyed by the Bank of America recently said that a potential AI bubble burst is the biggest threat to global equity markets in 2026. However, the broad view among market experts is that the likely outcome in 2026 would be a correction in AI stocks, not a bubble burst. Since AI valuations are not yet in bubble territory and most AI companies are making impressive profits, a sharp correction would be bought into preventing a bubble burst. Let’s wait and see how the scenario plays out.
A correction in AI stocks and the slow unwinding of the AI trade can turn out to be favorable for India. The massive FII outflow of $18 billion in CY25 (as on 20th December) was triggered by the elevated valuations and tepid earnings growth in India. The uptick in earnings growth and the unwinding of the AI trade have the potential to reverse the trend of FII outflows in 2026.
India’s macros are in fine shape. Despite the draconian Trump tariffs, India is likely to achieve GDP growth of about 7.3% in FY26. With CPI inflation trending at 1.8% for FY26, significantly undershooting RBI’s target of 4%, the central bank could afford to remain dovish for some more time. The massive monetary and fiscal stimulus provided to the economy in FY26 has triggered revival of consumption, thereby boosting the prospects of sustained economic growth. The Q2FY26 corporate earnings growth indicate revival of earnings growth, going forward. The single digit earnings growth during the last six quarters has been the single major factor weighing on markets. This is set to change. Earnings growth of about 15% is likely in FY27. The market will start discounting this and move ahead.
A trade deal early in 2026 and cessation of FII outflows have the potential to strengthen the rupee from the current levels in H1CY26. In brief, the market outlook appears promising in 2026.
Happy New Year!
