The era of easy, broad-based gains in the Indian stock market is officially over. As we step into 2026, a profound shift is underway, moving from a liquidity-fueled frenzy to a phase where cold, hard fundamentals dictate winners and losers. The 'fireflies' of the market—stocks that glittered brightly during the post-pandemic surge—are now dimming, signaling a new reality for investors.
The End of the Indiscriminate Rally
The period between 2020 and 2023 represented an extraordinary anomaly in India's financial history. A Mint analysis of 400 BSE 500 stocks reveals that nearly 97% of constituents delivered positive returns during this time, with a staggering three-fourths soaring by more than 80%. This was a market where momentum often trumped business fundamentals, lifted by a tidal wave of retail enthusiasm and abundant global liquidity.
However, the character of the market began its transformation in 2025. The broad gains gave way to a far more selective performance, tightly coupled with corporate earnings and underlying business strength. Experts point out that this marks a decisive transition to a market where returns hinge squarely on earnings durability rather than speculative momentum.
Fireflies Fade as Divergence Widens
The term 'fireflies' aptly describes stocks that surged in the post-Covid rally but are now fading as economic conditions normalize. Nearly 12% of companies that gained strongly earlier have since seen significant declines. This correction unfolded even as the benchmark Sensex rose approximately 46% over the 33 months from March 2023 to December 2025.
This highlights a critical and widening divergence. While the fireflies slipped into losses, roughly a quarter of BSE 500 stocks managed to outperform during the same slowdown. The current phase resembles a market repricing rather than outright value destruction. For instance, among 18 stocks that corrected 10-30% since March 2023, nearly two-thirds still trade at nearly double their March 2020 levels. Only the steepest corrections exceeding 50% have fully erased pandemic-era gains.
Ashish Chaturmohta, Managing Director and Fund Manager at Apex PMS, JM Financial, explains the reversal. "Many companies expanded capacity and fixed higher cost structures assuming elevated growth would endure," he said. He noted that volumes, pricing power, and margins normalized sooner than expected amid rising input costs and intensifying competition, leading to negative operating leverage and amplified corrections for stocks with stretched valuations.
The New Rulebook: Fundamentals and Selective Capital
The sectoral distribution of these fading stars is telling. While spread across the board, chemicals and banking, financial services and insurance (BFSI) companies dominate the list, followed by capital goods and consumer durables.
Puneet Sharma, CEO and Fund Manager at Whitespace Alpha, provides sector-specific insights. In chemicals, the unwinding of supply disruptions and export-led pricing power led to a sharp reversal. In BFSI, rising funding costs and tighter regulations exposed weaker players that were previously priced alongside stronger franchises.
The common thread among resilient performers is earnings-led growth. "Stocks that have held up share a common trait: performance was earnings-led rather than liquidity-driven," Sharma emphasized. Companies with strong balance sheets, disciplined capital allocation, and the ability to protect margins across cycles have remained resilient.
Looking ahead to 2026, experts agree that this divergence is likely to persist. Capital is becoming more selective in the absence of easy liquidity. Chaturmohta expects the year to favour companies demonstrating strong earnings quality, robust cash-flow conversion, and resilient balance sheets, especially within a macro environment shaped by geopolitical uncertainty and volatile commodity cycles.
For investors, the message is clear. The days of easy winners are behind us. Stock selection, based on rigorous fundamental analysis, will matter far more than general market direction, defining portfolio success in this new, more discerning era of Indian equities.
