15-year setback on cards? Nifty heading for worst annual performance since 2011

As we enter the final three months of the year, the benchmark Nifty index is staring at its worst calendar-year performance in 15 years. This is a sharp reversal for a market that until recently commanded some of the richest valuations in the world and appeared almost immune to global shocks. The index is down nearly 13% so far in 2026. If that decline holds through December, it would mark the Nifty's weakest calendar year since 2011, when the index tumbled 24.6%.

The damage was done mostly in the first three months of the year when Nifty plunged as much as 15%. The recovery in the April-June quarter with a meaningful 7% return has fallen flat with another near 5% slump in the July-September period.

The weakness also stretches well beyond this year. Since the end of September 2024, the Nifty has fallen nearly 12%. Parts of the broader market have been a saving grace. The Nifty midcap and smallcap indices are up so far this year.

What went wrong?

A combination of expensive starting valuations, an unprecedented foreign investor exodus, geopolitical shocks, rising oil prices and concern over earnings growth has gradually dismantled the premium investors were willing to pay for Indian equities.

Foreign money has been the biggest pressure point. Foreign portfolio investors (FPIs) have sold a record $24.6 billion of Indian equities in 2026 through August, even after returning as buyers that month.

Much of that money had been drawn towards AI-heavy markets such as Taiwan and South Korea, where semiconductor and technology stocks delivered far stronger returns. Analysts said the limited representation of direct AI beneficiaries in India kept the market out of one of the biggest global equity trades of the past year.

The selling resumed again in September. FPIs pulled Rs 13,138 crore from Indian equities in the first half of the month as crude prices, US bond yields and the dollar moved higher. Total foreign selling for 2026 had reached Rs 2.37 lakh crore till then.

Motilal Oswal puts the scale of the shift in a starker perspective. It estimates foreign investors have withdrawn about $56 billion over the past 24 months, effectively wiping out the cumulative FII inflows of the preceding eight years.

Domestic institutions have filled much of that hole, investing a record $177 billion over the same period, supported by mutual fund SIP flows running at more than Rs 30,000 crore a month. Without that domestic liquidity, the correction could have looked considerably worse.

The second blow came from geopolitics. The conflict in the Middle East sent crude oil sharply higher earlier this year, an uncomfortable combination for an economy that imports most of its oil requirements. Higher crude threatened inflation, the current account and corporate margins, while simultaneously putting pressure on the rupee and bond yields.

During the March sell-off, the Nifty lost about 7% in a single month as the conflict disrupted energy supplies.

Brent is still hovering around $100 a barrel in September, while the rupee has traded around 95-96 to the dollar. Higher oil has revived concerns around inflation and interest rates just as investors had begun looking for a cleaner earnings recovery.

India's IT sector has added another drag. Technology stocks were among the hardest hit earlier this year as investors worried that generative AI could pressure pricing and traditional outsourcing models, even as US clients remained cautious on spending. Reuters reported that the Nifty IT index slumped more than 21% so far this year.

Valuations provide some comfort

The correction, however, has removed a meaningful part of India’s valuation premium. The Nifty now trades at around 20.9 times earnings, below its five-year average of 23.5 times and 10-year average of 23 times. On a forward basis, the multiple has compressed to about 18.5 times, compared with 31.1 times for the Nasdaq and roughly 21-22 times for the S&P 500, Dow, Japan and Taiwan.

Midcaps have cooled too. The Nifty Midcap 150’s P/E has dropped to 31.1 times from 45.8 two years ago, while the Smallcap 250 trades at 31.7 times.

Can Nifty reverse the trend to end in positive?

Motilal Oswal believes the combination of cheaper valuations, an earnings recovery, resilient domestic flows and economic growth has improved the market’s risk-reward. The earnings puzzle could improve with profit growth for Nifty companies accelerating to an average 18% in the June quarter, the strongest pace in 10 quarters, with brokerages reporting more earnings upgrades than downgrades.

Jefferies has also found foreign investor sentiment gradually improving despite most FPIs remaining underweight India. The brokerage sees financials, particularly BFSI, as relatively attractive among large-caps, while investor interest is shifting towards power, infrastructure, new-age manufacturing and consumer internet companies. The big variables remain oil, inflation and interest rates.

Kotak Equities is more guarded. It argues that elevated global equity valuations leave little room for disappointment if oil prices or bond yields rise again -- risks that could quickly overpower an earnings recovery.

The market therefore enters the final three months of 2026 with improving earnings, and domestic liquidity, but foreign investors have not decisively returned, oil remains a threat and the rupee is under pressure.

Disclosure: This article has been written by Podishetti Akash, who is not a SEBI-registered Research Analyst or an Investment Adviser. Podishetti Akash and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclosureshere.