Market to find clear direction by 2025-end as earnings rebound: Motilal Oswal’s Siddhartha Khemka

After a year-long consolidation, Indian equities are poised to regain momentum by the end of 2025, says Siddhartha Khemka, Head of Research (Wealth Management) at Motilal Oswal Financial Services. With valuations normalising and earnings expected to rebound sharply from FY27, he believes the market is setting up for its next leg of rally.

Edited excerpts from a chat:

Now that we have seen time corrections for more than a year, do you think by the end of 2025 calendar year, the market would have found a clear direction?

Indian equities delivered a strong run in FY20–24, with Nifty earnings compounding at ~20% and the index outperforming global peers. Since late FY24, however, the narrative has shifted to time correction. Nifty earnings grew just ~5% in FY25, and FY26 is expected to remain in mid-single digit with Nifty EPS at ~₹1,096. From FY27, we see a sharp rebound with Nifty EPS projected at ~₹1,274, translating into ~16% growth, led by Financials, Autos, Capital Goods and Consumption.

Valuations, too, have normalized. Nifty’s one-year forward P/E now stands at ~20.6x, almost in line with its long-period average of 20.7x. On a trailing basis, the P/E has cooled to ~23.2x versus ~27x a year ago, allowing earnings to catch up with prices. With earnings bottoming in FY26 and recovery visibility into FY27, coupled with normalized valuations, we believe the consolidation phase is setting the stage for the next leg of the rally. By end-CY25, markets should have found clearer direction, backed by earnings acceleration, supportive macros and policy continuity.

How are you tweaking your portfolios ahead of the Q3 earnings season? Which sectors do you think can surprise on the upside and which ones are likely to disappoint?

As we closed on Q2FY26, earnings are expected to remain modest, with MOFSL Universe PAT projected to rise ~9% YoY, while Nifty earnings are expected to grow around 6% YOY in 3QFY26. The key drivers are Oil & Gas (+25% YoY), NBFC Lending (+21%), Telecom (moving to profit), Metals (+10%), Cement (+62%), Capital Goods (+14%), and Healthcare (+10%). These sectors are likely to account for the bulk of incremental earnings. On the weaker side, Banks—both private and PSU—are expected to decline ~7% YoY, extending the softness seen in H1. Insurance growth is likely to remain muted at ~6% YoY, while Autos are set for only ~5% growth. Consumer and Chemicals too will likely post subdued results. Portfolio positioning remains overweight on Autos, Industrials, Healthcare, BFSI, and Consumer Discretionary, and underweight on Oil & Gas, Cement, and Metals, balancing near-term volatility with long-term visibility.

FII flows are largely dependent on earnings and valuations. Once earnings growth starts coming in, valuations will also begin to look more reasonable. Given the expectations of earnings rebound from Q3, do you think 2026 would be the year of FII flow revival?

FII flows have been weak over the past year as earnings slowed, valuations stayed elevated, and global sentiment remained cautious. Since the Sep ’24 market peak, FIIs have sold about USD 27 billion, including USD 15.3 billion in CY25 YTD, even as DIIs infused a record USD 67 billion in 9MCY25, cushioning markets. Historically, flows have tracked earnings and valuations: in CY20–21, when Nifty earnings surged, FIIs invested USD 21–23 billion, while muted earnings in later years kept inflows subdued.

With FY26 earnings likely to post mid-single growth (~₹1,096 EPS), valuations have now normalized, with one-year forward P/E at ~20.6x, near its long-period average. From Q3FY26, earnings recovery should gain traction, with FY27 EPS forecast at ~₹1,274 (~16% growth). With earnings bottoming and valuations turning more reasonable, we expect that FII flows are likely to revive.

Auto sector has been the best performing one in the last few months given the positive outlook around GST, rate cuts, etc. Are valuations still reasonable or you would be a bit more cautious?

The auto sector has been one of the best-performing segments in recent months, supported by GST rate cuts, a 100bp reduction in interest rates, and improving rural demand. In Q2FY26, OEMs delivered ~13% YoY volume growth, led by two-wheelers, commercial vehicles, and tractors, while passenger vehicles rose just ~3% amid higher discounts and supply constraints. This is expected to translate into ~11–14% earnings growth for OEMs in the quarter, whereas ancillaries saw only ~3% profit growth.

On valuations, the sector now trades close to or slightly below its 10-year average, unlike several sectors still above long-term levels. Current multiples look reasonable given the earnings recovery and festive-season momentum. Medium term autos are expected to remain at the forefront of earnings growth into FY27. That said, selectivity is key — constructive on OEMs, cautious on passenger vehicles, and more measured on ancillaries where delivery is lagging.

With the surge of IPOs hitting the street, what’s your take on valuations and the sustainability of post-listing performance?

The primary market has remained active in 2025, with nearly 50 IPOs raising about USD 11.4 billion so far. This reflects abundant domestic liquidity and robust retail participation. Sectorally, Electronics and Power dominate the announced pipeline, alongside several large consumer and manufacturing names.

Post-listing performance, however, has been uneven. Companies with strong fundamentals, earnings visibility, and scalable models have managed to sustain gains, while those priced aggressively relative to listed peers or carrying weaker financials have underperformed. Many IPOs are still being launched at a discount to secondary market valuations, underscoring the importance of selectivity.

Looking ahead, the pipeline remains healthy with large issues expected across financials, consumption, and industrials. While fundraising momentum should continue, sustainability of post-listing returns will hinge on fundamentals and earnings delivery rather than initial demand.

Given how Motilal Oswal is gradually expanding its coverage base to cover a larger number of mid and smallcaps, what is your outlook on the opportunity size in the broader market in the current scheme of things? Which parts of the broader market are you most excited about?

Investor interest is gradually returning to the broader market, supported by improving earnings visibility and strong domestic flows. In Q1FY26, the Nifty Midcap-150 delivered 17% earnings growth against 8% for largecaps, underlining the relative strength of midcaps. While valuations in mid and smallcaps remain above historical averages, select themes stand out.

Within this space, EMS continues to benefit from rising electronics manufacturing demand and policy support. Healthcare offers steady compounding potential through hospitals and niche pharma. On the consumption side, discretionary midcaps in areas like travel, leisure, alco-beverages, and value retail are gaining from premiumisation and the shift from unorganised to organised players.

We like the Capital market theme like depositories participants, registrar, asset management companies as they are well placed, benefitting from strong retail participation and structural deepening of equity markets.

The broader market opportunity is sizeable, but sustainability will depend on disciplined selection and earnings delivery, making these structural mid and smallcap themes the most compelling.

Which themes within India’s consumption story do you believe are underappreciated by the market right now?

India’s consumption recovery is gathering pace, aided by GST2.0 rate cuts, easing inflation, and improving rural sentiment. Consumer discretionary is likely to outperform consumer staples. We like the consumer discretionary space as higher income levels and aspiration to consume would lead to higher growth for the sector.

Themes such as travel and hospitality are benefiting from robust domestic tourism and sustained occupancies, yet the durability of this cycle is not fully priced in. Mass-market retail in tier-2 and tier-3 towns is also expanding as consumers shift from unorganised to organised players.

Other areas including alco-beverages and premium apparel are supported by rising disposable incomes and premiumisation trends. While staples recovery is more visible, the market continues to underappreciate the long-term durability of these discretionary segments, which could emerge as key drivers of India’s consumption story going forward.

Looking ahead, what sectors or themes do you believe will drive alpha generation over the next 12–18 months?Alpha generation over the next 12–18 months is likely to come from domestic cyclicals and structural growth themes. Our portfolio positioning remains overweight on Autos, Industrials, Healthcare, BFSI, and Consumer Discretionary, while underweight on Oil & Gas, Cement, and Metals.

Autos are supported by GST cuts, lower interest rates, and a rural demand recovery, making them one of the strongest earnings drivers. Industrials and EMS benefit from robust order books, policy-led capex, and manufacturing incentives, keeping growth momentum intact. Healthcare offers steady compounding, with strong demand in pharmaceuticals, diagnostics, and hospitals.

On the consumption side, discretionary themes such as travel, leisure, and quick commerce continue to expand, supported by premiumisation and formalisation. In contrast, global cyclicals like IT services and Metals face external headwinds. Selectivity will remain crucial, but domestically driven sectors are best positioned to deliver superior alpha in this cycle.