India Set for Earnings-Led Comeback in 2026
India could see a significant recovery in 2026 after experiencing a challenging 2025. This resurgence is expected to be fueled primarily by earnings improvement rather than mere valuation expansion, as highlighted by Timothy Moe, Chief Asia Pacific Equity Strategist at Goldman Sachs.
Earnings Recovery: The Key to Foreign Flows
– Disappointing Performance: Moe noted that India had one of the weakest performances in Asia and emerging markets in 2025, experiencing its steepest underperformance against the broader EM index in almost three decades.
– Earnings Growth Prediction: Goldman Sachs anticipates a 15% earnings growth for the MSCI India index in 2026, potentially positioning India as a moderate outperformer within the emerging market landscape.
– Valuation Context: With India trading at about 22 times forward earnings, Moe remarks that while this rate seems high, it remains defensible due to long-term growth prospects. He believes that future returns will largely depend on earnings delivery rather than further valuation expansion.
Sector Opportunities Supporting Earnings Growth
Moe expressed optimism about several domestic-focused sectors that could bolster earnings:
– Financials: A recovery in the private credit cycle.
– Automobiles and Mass Consumption: Potential growth in consumer spending.
– Staples, Defence, and Consumer Durables: Increasing relevance in everyday life.
– Select Oil Marketing Companies: Benefitting from local consumption dynamics.
These sector-specific insights support Goldman Sachs’ confidence in achieving the projected earnings growth.
Understanding Foreign Investor Dynamics
Foreign investors have retreated as India’s valuations soared while earnings growth lagged during an economic slowdown. Moe pointed out:
– Shift in Portfolio Weighting: India, once heavily favored in emerging market portfolios, is now underweighted by many global investors.
– Domestic Resilience: Strong local participation, particularly through systematic investment plans (SIPs), has countered the outflow of nearly $19 billion from foreign investors in 2025 and another $2-3 billion thus far in 2026.
Potential Catalysts for 2026 Recovery
Moe identified three critical factors that could reignite foreign investor interest in India:
1. Consistent Earnings Delivery: Confidence in corporate performance must be established.
2. Progress on the US-India Trade Deal: Improvements in sentiment could arise from favorable trade discussions.
3. Supportive Union Budget: A budget that balances fiscal discipline with growth initiatives will be key.
He remains positive that India can sustain growth above 6%, approaching 7%, this year.
Economic and Currency Outlook
Goldman Sachs expects the Indian rupee to stabilize around 90 per US dollar, alleviating pressures on export-oriented sectors while correcting previous sharp fluctuations.
In the IT services sector, Moe noted that while AI-related concerns disrupted sentiment in 2025, Indian IT firms are historically adept at adapting to technological changes. Successful integration of AI could help assuage foreign investor apprehensions.
Embracing a Multi-Dimensional Market
Moe dismissed the idea that China’s stronger performance must harm India’s investment prospects. He stated:
– Global Capital Dynamics: Capital allocation isn’t confined to Asia or EM benchmarks. Large pools of global capital can favor both India and China if fundamentals support such positions.
– Robust Domestic Savings: An independent and robust support base for equities exists within Indian households.
Valuations and Risks Ahead
With Indian equities trading at a low-20s price-to-earnings ratio, Moe forewarned that potential upside hinges almost entirely on earnings growth. Key risks include:
– Earnings Recovery Delays: Failure to meet expected earnings targets could dampen sentiment.
– Capital Diversion: Continued capital movement towards AI-driven markets like Korea and Taiwan may overshadow Indian equities.
Moe concludes that while India may see a slower recovery, there remains a strong investment case for the country, which is expected to develop throughout 2026.