Artificial Intelligence Emerges as a Secular Growth Theme, Earnings Downside Risk Now Behind Us: Waterfield Advisors

Market Outlook Report: Q3FY26

Domestic Market

The domestic market is struggling to sustain gains due to a lack of fundamental fuel. However, Q3FY26 is expected to be a decisive turning point, marked by a broad-based earnings recovery in corporate India. This revival coincides with a shift in liquidity dynamics, with positive Foreign Institutional Investor (FII) flows returning in February.

Investment Strategies

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• Equities: The confluence of renewed foreign interest and structural earnings upturn creates a "double engine" for the bulls, potentially providing depth and stability for the market to sustain its upward trajectory.
• Gold: While gold has outperformed the Nifty over the past 20 years, its recent outperformance is largely due to currency depreciation and periodic global uncertainty rather than structural economic growth. Investors should view gold as a strategic diversifier rather than a compounding growth engine.
• Silver: No specific investment strategy is mentioned for silver in the report.

Q3 Earnings

The worst in terms of corporate earnings appears to be behind us, signaling a structural turnaround for the markets. The recovery is evident in the sequential momentum for companies with a market cap greater than ₹5,000 crores, with median sales growth accelerating from 9-9.5% in Q1FY26 to 11-12% in Q3FY26.

Key Highlights

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• Median Operating Profit growth climbed to 15-16% in Q3FY26 (up from 10-11% in Q1).
• Median PAT growth surged to 17-18% in Q3FY26 (up from 12-13% just two quarters ago).
• The recovery isn't limited to the largest firms; mid-cap and small-cap segments are outperforming large caps in profitability, delivering median PAT growth of 18-20% each.

Market Implications

The Q3 earnings recovery provides a strong fundamental floor for the market. Coupled with corrected valuations and the return of positive FII flows in February, this structural improvement creates a powerful setup for the markets.