Market rally continues but fundamentals are weakening, warns Dipan Mehta

The Indian stock market may be rallying, but seasoned investor Dipan Mehta, Director at Elixir Equities, is not ready to turn bullish just yet. In a candid conversation with ET Now, Mehta laid out a detailed case for caution — even as markets post gains and a strong earnings season approaches.

The rally feels good. The fundamentals don't

Mehta's central concern is simple: momentum is pushing markets higher, but the underlying fundamentals are quietly deteriorating. "The damage to the fundamentals is yet to be reflected," he told ET Now, adding that the real test will come from March quarter management commentary and how companies perform in the June quarter.


In his view, markets cannot sustain a new bull phase beyond previous highs without stronger earnings backing. Right now, the opposite is happening.

A poor monsoon could hurt more than expected

India has not faced a seriously weak monsoon in four to five years. If early forecasts of a subnormal monsoon prove correct, the ripple effects could be wide. Mehta flagged concern for fertiliser and insecticide companies, while also warning on rural-facing businesses including two-wheelers. He specifically named Hero MotoCorp and Mahindra & Mahindra as stocks carrying meaningful agricultural exposure.

Combined with higher oil prices, a weak monsoon could push food inflation up, pressure interest rates, and ultimately weigh on corporate profits and valuation multiples.

Banks are no longer a safe bet

After four to five quarters of smooth sailing, Mehta believes the lending sector is entering a more challenging phase. PSU banks are aggressively competing for deposits, low-cost funds are harder to raise, and the era of easy net interest margins may be ending.

For private sector banks, including HDFC Bank and ICICI Bank, he sees limited upside. Industry loan book growth has slowed from 15–16% to sub-10%, and even top private banks may manage only low double-digit growth going forward.

His preferred plays within the sector are multi-product NBFCs — Bajaj Finance, L&T Finance, Cholamandalam, and Poonawalla — along with PSU banks, where he still sees room for PE multiple rerating.

Largecap IT remains a sector to avoid

Mehta continues to stay away from largecap IT stocks, citing unresolved uncertainty around the impact of artificial intelligence on software businesses and enterprise spending. Until there is more clarity on how AI reshapes the sector, he prefers to hold rather than add exposure.

Defence: Great sector, wrong time to chase

Defence stocks are attracting heavy investor attention given the current geopolitical climate, but Mehta urges patience. He describes the sector as over-owned and momentum-driven right now, with execution risk still a real factor. His advice is to wait for price corrections or earnings surprises before entering — and focus on quality private sector defence companies when that opportunity arrives.

This earnings season won't drive markets to new highs

Despite expecting decent headline numbers this quarter, Mehta does not believe the earnings season will act as a market catalyst. Markets are forward-looking, and investors are already thinking about the June and September quarters — when higher oil prices, unresolved trade tariffs, geopolitical tension, and monsoon stress will all show up in company results simultaneously.

"This earning season will be good on paper," he said, "but I do not think it will become a trigger for the market to go to new highs."

His overall message is clear: enjoy the rally cautiously, watch the June quarter closely, and do not let short-term momentum mask the structural headwinds building underneath.