AI Not Primary Driver of Market Recovery: Experts Point to Macro Stability and Earnings Growth

India's Market Recovery to be Driven by Macroeconomic Stabilization and Earnings Catch-up

India's market recovery will be dictated by macroeconomic stabilization and earnings catch-up, not merely the presence or absence of an AI tailwind, according to Riddhiman Jain, the Managing Director, Head of Investment Strategy & Solutions at Waterfield Solutions. Jain believes that focusing on renewable energy and energy security themes is the right approach, given the government's target of 500 GW of non-fossil capacity by 2030.

The absence of direct AI hardware plays has caused Indian equities to miss out on specific thematic global flows, but it is not the primary driver of recent underperformance. Heavy FII selling witnessed through 2025 and early 2026 was largely a function of stretched domestic valuations compounded by severe geopolitical headwinds.

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A de-escalation in West Asia is the ultimate needle-mover for India, as it will stabilize the Rupee, rein in the Current Account Deficit, and restore the dollar-adjusted returns that foreign investors seek. India imports around 90% of its energy needs, making a cooling of crude oil prices crucial for the country's macroeconomic stability.

The trajectory of FY27 growth remains highly sensitive to external shocks, including elevated crude oil prices. However, India's structural buffers, such as sustained infrastructure spending and robust services exports, should prevent a severe slowdown, creating a reliable growth floor.

While banks boast the cleanest balance sheets in a decade, structural improvement is already priced into their valuations, leaving little room for a multiple re-rating. System-wide deposit growth continues to lag credit demand, forcing intense competition for liabilities between private and PSU banks.

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The more productive positioning within financials is to pivot toward capital-light, structurally underpenetrated plays. Capital market intermediaries are direct beneficiaries of rising financialization and equity participation, with operating leverage that does not depend on the liability franchise.

Insurance penetration in India remains below 4% of GDP, well below the emerging market average, offering a long runway of structural growth uncorrelated to credit cycles. These sub-segments offer genuine earnings compounding without the NIM overhang that continues to weigh on traditional banking.

India's energy security strategy is one of the key concerns for Foreign Portfolio Investors (FPIs). Because India imports roughly 90% of its crude oil requirements, geopolitical disruptions act as an immediate macroeconomic headwind.

Elevated crude prices widen the current account deficit and exert downward pressure on the Rupee, which severely dampens unhedged foreign investor sentiment. FPI flows are highly sensitive to earnings momentum, and historical oil supply shocks have typically triggered corporate earnings downgrades.

Corporate earnings in Q4FY26 held up on the surface, but the stability masked building input cost pressure. Manufacturing and consumer-facing companies typically operate on forward contracts and older inventory cycles, which means the crude spike witnessed through Q4 will genuinely begin compressing operating margins in Q1FY27.

For the full year, current Street expectations look optimistic relative to what the macro environment is likely to deliver. The sectors best placed to hold earnings through this period are those with limited import-cost exposure or explicit pass-through mechanisms, telecom, healthcare, utilities, and contracted-revenue infrastructure. The broader market earnings recovery, when it comes, will be led by those pockets rather than a simultaneous re-rating across the index.