“It does not really feel like that markets have hit a new high,” observed Manish Sonthalia, from Emkay Investment Managers noting that while frontline indices have crossed the previous peak of 26,277 from September 2024, the gains haven’t trickled down evenly. “There is some distance where the midcap stocks have still to reach and there is some distance where the smallcap index is still to reach the all-time highs. So, there is a lot of pain in the broader markets.”
Sonthalia pointed out that while index heavyweights—particularly in banking—are holding firm, midcaps and smallcaps continue to lag. Earnings momentum, however, remains encouraging. He expects next year’s earnings growth at 15–16%, with a two-year CAGR of 13–14% through FY26–27. This, he believes, could lift the Nifty 50 by nearly 15–16% over the next 12 months. “The real cheer in the markets would come when there is some green, some deep green that is seen in the midcap index and the smallcap index,” he said.
A major reason for the underperformance of the broader markets is liquidity stress. According to Sonthalia, a significant chunk of money has been shifting from secondary markets to the primary market, where IPO activity has surged. With a ₹40,000-crore issuance pipeline in December alone, funds are getting diverted.
“The smallcap segment is a very large universe,” he explained. “There is a problem of liquidity. Liquidity is tight in the system… Valuations have come down significantly for the mid and the smallcaps per se. But this whole thing will get better… once liquidity in the system revives or there is not too much of over-bunching of IPOs.”
Looking ahead, Sonthalia expects rate-sensitive sectors to lead the next phase of earnings growth. “Rate sensitives are in a very sweet spot… whether it be banks, NBFCs, insurance, real estate, automobiles,” he said.
With inflation—both CPI and WPI—comfortably low, he believes India is moving toward a lower-rate cycle. While he acknowledged the possibility of a pause in the upcoming policy decision due to currency pressure, he added that a 25-bps cut in the next policy meeting looks increasingly likely. “You cannot keep too low a spread between the US rates and the Indian rates,” he pointed out.
On the macro front, he acknowledged concerns around subdued tax collections and slower nominal GDP growth. “The problem for the Indian economy is not the real GDP growth rate but the nominal GDP growth rate,” he said. Achieving a 10% nominal growth, he believes, remains challenging in the current low-inflation environment.
However, he expects stronger activity in Q3 and Q4, aided by government-led consumption measures including income-tax and GST cuts and upcoming 8th Pay Commission–linked payouts. “They are on course to meet their full-year targets… third quarter and the fourth quarter you would see heightened economic activity and that should result in better receipt collections,” he said.
Despite headline highs, the market’s next leg will depend heavily on liquidity and broader participation—something that, for now, remains missing.
