Markets stuck in a holding pattern as earnings and trade clarity remain elusive: Harsha Upadhyaya

Indian equity markets have begun 2026 on a subdued note, increasingly decoupling from global peers. Despite pockets of optimism around macro growth and policy stability, price action over the past few weeks suggests investors are still grappling with unanswered questions on earnings visibility and trade-related developments.

Speaking to ET Now, Harsha Upadhyaya, CIO, Kotak Mahindra AMC acknowledged that the current phase is marked by hesitation rather than outright pessimism. The absence of strong triggers—either on the earnings front or from geopolitical and trade negotiations—has kept indices range-bound.

Harsha Upadhyaya summed up the prevailing mood by pointing to a combination of factors weighing on sentiment. According to him, “Clearly, both of those factors, the impending trade deal as well as the earnings scenario, which has not really turned around in a big way as yet, are keeping markets at a particular range. While the valuations may have corrected to some extent in the largecaps and certain midcaps, at the broader end of the market the valuations are still expensive.”


Upadhyaya added that without a decisive improvement in earnings growth—particularly in the smallcap segment—it is difficult to expect broad-based positivity.

“Until and unless the sentiment turns or there is a real pickup in terms of the earnings growth trajectory for small caps, we may not see all-around positiveness in the market,” he said. That said, he believes the medium-term outlook is improving.

“For 2026, we do expect a moderate recovery in earnings growth, and given the fact that we have already seen a consolidation for almost about one-and-a-half years, we do believe that 2026 returns will be moderately better than 2025.”

While GDP growth remains supportive, Upadhyaya struck a cautious note on near-term earnings momentum. He pointed out that recent quarters have seen a deceleration in the earnings trajectory, even though downgrade cycles appear to be largely behind.

“We are yet to see upgrades in the market,” he noted, adding that while Q3 earnings are expected to be sequentially better than Q2, the rebound is not strong enough to materially shift market sentiment. Delays and uncertainty around an India–US trade deal have only added to the inertia, leaving markets stuck in a narrow band.

On the IT sector, often seen as a bellwether for global demand, Upadhyaya said results so far have been largely in line with expectations, offering little excitement. “When you look at the expectations for the rest of financial year 26 and financial year 27, this sector is likely to lag average market earnings growth,” he said. In his view, IT remains a defensive allocation—steady cash flows but limited upside—prompting an underweight stance.

Financials, however, remain a relative bright spot. Upadhyaya maintained a positive view on the sector, particularly over a one- to two-year horizon. While NBFCs and public sector banks have outperformed in 2025, large private banks have lagged on stock performance despite improving business fundamentals. “We have seen most of the cost pressures that came through because of the repo rate cut probably behind us. We should also expect credit growth improvement over the next few quarters,” he said, noting that asset quality concerns are largely contained. With valuations remaining reasonable after a period of underperformance, he expects the broader financials basket to deliver stronger earnings growth through 2026 and 2027.

Looking ahead, Upadhyaya believes markets could break out of their current range if either a trade deal materialises or earnings surprise on the upside. “For the full year, we do expect slightly better returns than 2025,” he said, though he cautioned that any recovery is likely to be moderate and far from the bull run witnessed between 2020 and 2024.

Sectorally, he sees Q3 earnings strength emerging from domestically driven segments. Telecom, automobiles, cement and oil marketing companies are expected to report robust numbers, while metals may see improvement later rather than in the immediate quarter. Globally linked sectors, by contrast, could continue to lag.

With the Union Budget approaching, expectations remain tempered. Upadhyaya highlighted that while real GDP growth has improved, low inflation has capped nominal GDP growth, limiting fiscal flexibility. “It is very unlikely that you will see a very large increase in terms of capital spend,” he said, though a 10–11% rise in capex would still be healthy given the higher base. He expects the government to continue balancing capital expenditure with measures to support consumption, including refinements to PLI schemes. On taxation, however, he sees little room for major changes in the upcoming Budget.

For now, markets appear to be waiting—caught between improving medium-term fundamentals and a lack of immediate catalysts. Until clarity emerges on earnings upgrades or trade developments, range-bound moves may well remain the defining feature of the current phase.