Heavy IPO supply may cap market upside in 2026; returns likely to stay moderate: Ashish Gupta, Axis MF

Indian equity markets may struggle to deliver outsized returns in 2026 as a surge in equity supply from IPOs and promoter stake sales continues to weigh on valuations, according to Ashish Gupta, Chief Investment Officer at Axis Mutual Fund.

Speaking to ET Now, Gupta said that while domestic equity inflows remain structurally strong, rising supply has created a tight demand–supply balance that is preventing a runaway rally, especially in mid- and small-cap stocks.

Strong domestic flows, but supply has risen faster

Over the past five to seven years, India’s equity markets have been underpinned by steady domestic inflows, particularly through mutual funds and SIPs. These flows have remained resilient even amid volatility over the last six months.


However, Gupta cautioned investors against assuming that strong inflows alone guarantee higher market returns.

“Markets are driven by both demand and supply. While domestic demand has been strong, supply has also expanded sharply over the last two years,” he said.

According to Gupta, India saw nearly 100 IPOs last year and 91 IPOs in 2024, raising approximately ₹1.7–1.8 lakh crore. In addition, promoters and private equity investors sold close to ₹3 lakh crore worth of shares, taking total equity supply to nearly ₹5 lakh crore.

This exceeded net domestic inflows of just over ₹3 lakh crore, creating pressure on broader market performance—especially as foreign institutional investors (FIIs) turned net sellers.

Why headline indices masked broader market weakness

While the Nifty ended last year with gains of around 10%, Gupta pointed out that headline indices did not reflect underlying market stress.

“The median stock return was actually negative 4%. Small-cap indices declined nearly 6% because most of the supply came into mid- and small-cap stocks,” he said.

Large-cap stocks, particularly index heavyweights, were relatively insulated from supply pressures, but broader market breadth deteriorated significantly.

IPO pipeline remains heavy in 2026

The supply overhang is unlikely to ease anytime soon. Gupta noted that more than ₹1 lakh crore worth of IPOs have already been filed with the market regulator, with bankers indicating a similar pipeline waiting to be launched.

Several large IPOs are also expected to hit the market in 2026, further tightening the demand–supply equation.

“This will keep valuations under check and make a year of very strong market returns unlikely,” he said.

Mid- and small-cap valuations most vulnerable

Gupta explained that elevated valuations have encouraged both private equity exits and fresh listings. Since mid- and small-cap stocks significantly outperformed in 2023 and 2024, their valuation multiples rose to a premium over large caps.

“When new companies come to the market, they usually list at a discount to prevailing multiples. Investors rotate into these cheaper alternatives, which puts pressure on existing stocks,” he said.

While this has led to valuation compression, Gupta added that the correction is not necessarily unhealthy.

“If this supply hadn’t come in, mid- and small-cap valuations could have become extremely frothy,” he said.

Sectors to watch in 2026

Despite the moderation in overall market expectations, Gupta remains constructive on select sectors where earnings growth visibility is improving.

Financials continue to be a key theme, supported by a sharp recovery in credit growth. System-wide credit growth rose from 8–9% earlier in the year to around 14.5% by December, aided by monetary and regulatory easing.

Banks and NBFCs are both beneficiaries, with credit costs for NBFCs—particularly those exposed to microfinance and unsecured loans—beginning to decline after last year’s stress.

Automobiles are another sector showing cyclical improvement. Gupta said the sector benefits from both consumption recovery and financial easing.

“Passenger vehicle and two-wheeler demand has picked up since September–October. Even the commercial vehicle cycle is now turning favourable,” he noted.

On the consumption front, rural demand has shown signs of recovery in the second half, while urban demand has improved after GST rate cuts. However, Gupta cautioned that the recovery is uneven.

“There are pockets of discretionary consumption seeing improvement, but retail consumption remains softer than expected,” he said.

Investor takeaway: Temper return expectations

Gupta advised investors to recalibrate expectations in a market environment dominated by high supply and selective earnings growth.

“This is not a year for broad-based rallies. Stock selection, sectoral focus and realistic return assumptions will matter far more,” he said.

As IPO supply continues to expand and valuations adjust, markets may remain range-bound even as underlying economic growth stays intact—making discipline and selectivity critical for investors in 2026.