The year 2025 saw global equity markets sprinting ahead in a spectacular rally, but Indian benchmarks, the Nifty50 and the BSE Sensex, found themselves struggling to match the pace. While key Asian and Western indices posted double-digit surges, India's premier indices delivered more subdued returns, leaving investors pondering the reasons and the road ahead for 2026.
The Global Sprint vs. India's Jog
Global markets delivered a stellar performance in 2025. South Korea's Kospi led the charge, skyrocketing nearly 76%, followed by Hong Kong's Hang Seng climbing over 30% and Japan's Nikkei soaring more than 25%. China's Shanghai Composite also posted robust gains exceeding 16%. In the West, Wall Street joined the party with the tech-heavy Nasdaq up 21%, the S&P 500 rising 17.5%, and the Dow Jones advancing over 14%.
In stark contrast, India's benchmark indices posted more modest returns. The Nifty 50 rose just over 10%, while the Sensex ended the year 8.55% higher. On the final trading day of the year, December 31, the Sensex closed at 85,220.60, up 545.52 points, and the Nifty 50 finished at 26,129, gaining 190 points. Despite touching record highs recently, the broader market sentiment remained weak, with nearly half of the NSE's top 500 stocks trading below the benchmark.
What Dragged Dalal Street Down in 2025?
Market experts point to a confluence of internal and external factors for the relative underperformance.
Muted Corporate Earnings: A significant drag was the slowdown in corporate profit growth. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, noted that earnings growth has been in single digits for the last six quarters, emphasizing that "the market is a slave of earnings." Sunny Agrawal of SBI Securities highlighted a deceleration in earnings momentum since the June 2024 quarter.
Persistent FII Selling: Foreign Institutional Investors (FIIs/FPIs) turned net sellers, withdrawing a massive Rs 1,04,050 crore from Indian equities throughout 2025. Ankit Soni of Mirae Asset Sharekhan pointed to consistent selling pressure from foreign investors, promoters, and PE firms, which prevented markets from sustaining rallies.
Missing the AI Boom: India largely missed the Artificial Intelligence-led rally that powered markets in the US, China, Taiwan, and South Korea. Vijayakumar termed India an "AI loser," which reduced its attractiveness for global fund managers seeking pure-play AI stories.
Valuation Concerns & Currency Volatility: Indian markets were perceived as expensive compared to other emerging markets, prompting capital outflows. Simultaneously, the rupee's instability, depreciating over 5% during the year and hovering around 90 per US dollar, created a negative feedback loop, triggering further FPI outflows.
External Headwinds: Geopolitical tensions, delays in the US-India trade deal, and new tariff impositions by the US—including a 25% tariff on Indian imports for purchases of Russian oil—added to the uncertainty and weighed on export-oriented sectors.
Dalal Street 2026 Outlook: A Year of Cautious Optimism
As the calendar turns, experts express cautious optimism for Indian equities in 2026, expecting a better performance than in 2025.
Consolidation Phase Ending: Analysts like Ankit Soni view 2025's subdued momentum as a necessary pause or consolidation phase after a strong rally from 2022 to 2025, setting the stage for future growth.
Funds Expected to Return: A key positive is the anticipated reversal of foreign fund flows. Siddarth Bhamre of Asit C Mehta Investment Intermediates believes a depreciated rupee and now-comfortable valuations create an ideal setup for FIIs to return. Soni added that a good monsoon, a favourable kharif season, and RBI initiatives could encourage FII inflows, potentially stabilizing by FY27.
Improved Valuations & Earnings Revival: Valuations have turned more reasonable. Sunny Agrawal noted the Nifty50 is trading at a 1-year forward P/E of 19-20x, down from 22-23x in September 2024. Its valuation premium over the MSCI EM index has compressed from 80% to 47%. Corporate earnings are expected to revive, growing in line with India's nominal GDP of 10-11%.
Sectoral Revival: Sectors like automobiles (after years of underperformance), IT, metals, and PSU banks are identified as potential growth engines for 2026. Government capital expenditure announcements in the upcoming budget could also provide a significant boost.
Nifty & Sensex Targets for 2026
Experts have set bullish but varied targets for the benchmarks. In a bull-case scenario, VK Vijayakumar predicts the Nifty could reach 29,800 and the Sensex 98,000 by end-2026. Ankit Soni sees Nifty touching 28,500-28,000 in FY27. Agrawal estimates Nifty50 FY27 EPS at Rs 1280-1300, which at a PE of 22-23x could push the index to 28,500-30,000 levels.
Investment Strategy & Key Risks for 2026
Most experts advise a large-cap-focused portfolio due to reasonable valuations and stronger balance sheets. A suggested allocation is around 70% large caps, 20% mid caps, and 10% small caps, with careful stock selection in the mid and small-cap space.
Risks for 2026 include a potential burst of the US AI tech bubble, a spike in crude oil prices, a reduction in domestic liquidity, and earnings disappointments in overvalued pockets. Weak execution by companies could lead to sharp corrections, especially in the mid and small-cap segments.
In summary, while 2025 was a year of underperformance for Indian equities amidst a global bull run, 2026 holds the promise of a stronger comeback, driven by improved valuations, expected earnings recovery, and the potential return of foreign capital. However, investors must navigate external uncertainties and focus on disciplined, bottom-up stock selection.
