Navigating Equities in 2026: India's Rise Amid US Market Dynamics

Indian Equity Market Outlook 2026

• The Indian equity market is showing improved fundamentals with earnings bottoming out and expected acceleration driven by government reforms, better liquidity, and policy support
• The NIFTY 50 index is projected to rise between approximately 7% to 17% by June 2026 by various analysts, with targets ranging from about 26,700 to 30,098 levels. More bullish views expect up to 28,000 - 28,500 by end of 2026, implying 10-14% upside from now
• NIFTY Midcap 100 targets show potential growth in the range of 20% to 30% by 2026, indicating strong mid-cap performance possibilities
• Small-cap valuations are elevated but expected to grow by around 10% earnings growth in coming quarters, with a cautious but constructive outlook
• Market stability is supported by domestic investor participation, steady earnings, and favourable policy initiatives, despite some global uncertainties

The US Equity Market Outlook 2026

• The S&P 500 is expected to gain moderately, with forecasts pointing to a 6%-8% upside by June 2026. UBS projects the S&P 500 to reach around 6,400-7,300 by mid-2026, supported by easing inflation, Fed’s rate cuts, and solid earnings growth
• The Nasdaq is expected to continue growth driven by technology and AI stocks but may face macroeconomic uncertainties and trade tensions impacting some sectors
• Overall, US markets exhibit cautious optimism with a favourable macroeconomic backdrop but less aggressive growth than Indian markets given higher valuations

Buffett’s Current Market Signal

• Unprecedented Cash Holding: Berkshire’s record $382 billion cash reserve represents extreme caution. Historically, such levels precede either major deals or periods of broad market repricing
• Buyback Moratorium: A five-quarter halt in share repurchases, even as the stock trades below its 2024 peaks, underscores Buffett’s view that current valuations lack a margin of safety. Berkshire at roughly 1.72x book value implies overpricing by his own standards
• Market Overvaluation Indicators: The Buffett Indicator (US market cap to GDP) near 222% (as of November 5’2025) reflects a market priced for perfection—levels that previously foreshadowed corrections in 2000 and 2021
• Bottom line: Buffett’s combination of record cash, halted buybacks, and equity trimming is a nonverbal caution flag. It signals systemic overvaluation, thin risk premia, and readiness for substantial opportunity once the market’s excesses unwind. Investors would do well to interpret this as a call for patience, discipline, and liquidity over FOMO-driven chasing

What will be the impact on Indian equity markets if the US equity markets correct significantly?

A sharp correction or collapse of more than 50% in US equity markets by 2026 is a low probability but plausible scenario given some analyst warnings about bubbles and macro risks, with some predicting up to 30% corrections while others foresee possible rallies. A decline of the magnitude of 50% is generally considered extreme but is not impossible if triggered by a severe recession, geopolitical shock, or systemic financial crisis.

If such a US market crash were to occur, the impact on Indian equity markets would likely be significant and negative, primarily because Indian markets are historically sensitive to global risk sentiment and US market moves. The correlation between the S&P 500 and Nifty 50 returns is high (around 65%), and Indian equities tend to decline alongside major US corrections due to foreign portfolio investor (FPI) withdrawals, rupee depreciation, and overall risk aversion affecting capital flows.

Historical precedents like the 2008 financial crisis saw Indian markets fall almost 60% from peaks due to FPI sell-offs and contagion effects, while recent mid-2025 weakness in Indian equities was also linked to US policy uncertainties and tariff shocks. A crash in the US could trigger repeat large outflows of foreign capital from India, pressure on the currency, and a flight to safety affecting Indian market valuations and liquidity.

However, India also has some buffers such as robust domestic retail participation, improving domestic earnings fundamentals, and government reforms that can partially offset external shocks. But a 50% US equity collapse would almost certainly induce heightened volatility and a sharp downturn in Indian equities, especially in large caps and export-linked sectors.

Overall Outlook

Indian equities are generally projected to outperform US equities by mid-2026, driven by a cyclical earnings revival, government reforms, and stable domestic investor support, especially in mid and small-cap segments. The US market is expected to continue its recovery with moderate gains supported by Fed easing and strong earnings but faces valuation pressures and global uncertainties.

Will funds rotate out of the US markets due to extreme valuations, very high debt to GDP and move to emerging markets like India which has not performed over past 1 year?

There is indeed a growing expectation among market experts and investors that funds might rotate out of US markets due to extreme valuations, very high debt-to-GDP ratios, inflation concerns, and slower economic growth, and allocate more capital to emerging markets like India that have underperformed in the past year but have stronger growth potential and attractive valuations.

Key points on this rotation and its impact on Indian markets:

• India stands out as a likely beneficiary of global fund rotation due to robust GDP growth projections (around 6.4-6.7% in 2025-26), corporate earnings improvement, and government reforms supporting investment and consumption
• The increasing domestic investor base, including retail mutual fund SIPs, along with improving corporate earnings, provides a stabilizing buffer against sharp corrections seen in prior years tied solely to foreign capital volatility
• Historically, Indian markets were quite sensitive to foreign fund outflows leading to amplified corrections. However, since around 2023-2024, Indian equities have become somewhat decoupled from US market vagaries due to stronger domestic participation and better earnings fundamentals. For example, during the USD 11 billion FPI outflow in 2024, the NIFTY 50 dropped only 6.2% versus much larger drops earlier
• If a significant rotation of global funds into Indian markets occurs amid a US market correction, Indian markets are likely to correct less severely and potentially outperform due to inflows cushioning the sell-offs, domestic resilience, and relatively lower valuations
• Still, global risk aversion and currency volatility may cause some near-term fluctuations, particularly in export-dependent and small-cap segments, but the overall impact should be more supportive than in past cycles

In summary, a rotation of funds out of US equities driven by valuation and macro concerns toward emerging markets like India is a plausible scenario in 2026. This rotation would likely make Indian markets less prone to sharp corrections even if the US markets face significant downturns, supported by domestic investors, improving earnings, and continued foreign inflows into India.

Read the above note in conjunction with my earlier note dated 27th October 2025 titled: Time to Look Beyond NIFTY 50 for returns in 2026

Disclaimer:

These are personal views of the author. This note should not be construed as investment advice. This is for information purposes only.