Earnings Recovery Signs Emerge as AI Spurs New Opportunities

Market Volatility: A Normalcy Test for Indian Equities

The Indian equity market has been experiencing significant volatility in recent times, with the BSE Sensex oscillating between gains and losses. However, Deepak Shenoy, CEO of Capitalmind Mutual Fund, believes that this volatility is a normal phenomenon and not a cause for concern.

Recovery Signs

According to Shenoy, the domestic market is still recovering from a 2025 downturn driven by factors such as the India-Pakistan war, new tariffs, and slowing earnings. Despite this, he sees signs of recovery in earnings, with median large-cap earnings growth at 14% year-on-year and mid- and small-cap earnings growth at 18% year-on-year. These numbers are actually better than they appear, as they include one-time hits from new labor laws that impacted growth by 3% to 5%.

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Valuation Assessment

Shenoy assesses the Indian market valuations as follows: while the index is still above the median and could be considered overvalued, the composition of the index has changed significantly over the years. With companies having longer growth runways, the valuations may not be as high as they seem. However, there are significant valuation disparities at the sector level, with cement and steel trading at high multiples and IT and private banks being relatively cheap.

Equity Strategy

For the mid- and small-cap segments, Shenoy recommends a cautious approach, given the high India VIX. He suggests that the market may trend sideways or downward in the near future, with a potential recovery likely in the latter part of 2026.

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Investment Strategy

Ultimately, the decision to increase exposure to equities depends on the investor's risk profile. If an investor is unsure about the right time to increase exposure or prefers not to actively manage it, a multi-asset fund can be a good option. These funds offer tax efficiency and allow professional managers to make allocation decisions based on quantitatively tested models. However, if an investor actively tracks markets and prefers managing allocations themselves, they should assess whether their current equity exposure has drifted away from their ideal level and consider rebalancing through fresh SIPs or an arbitrage fund with a Systematic Transfer Plan (STP).