Indian stock markets are set for a strong rally after 16 months of consolidation. Earnings growth is accelerating, and sentiment is improving following the India-US trade deal. The BFSI sector is expected to see over 15% earnings growth by FY27. Consumer discretionary is also poised for a comeback. Smallcaps trading at 10-15 PE could outperform.
After 16 months of market consolidation, a powerful rally could be emerging as earnings growth accelerates and sentiment improves post the India-US trade deal. In an interview with ET Now, Julius Baer’s Rupen Rajguru reveals why BFSI sector will deliver 15%+ earnings growth in FY27, why consumer discretionary is positioned for a comeback, and why smallcaps trading at 10-15 PE could outperform in the second half — despite index valuations looking stretched. Here’s the complete roadmap for the next 15-18 months.
Indian equity markets have been consolidating for 16 consecutive months, creating a technical base that could fuel the next significant rally. According to Rupen Rajguru, MD and Senior Advisor at Julius Baer, three critical factors are now aligning:
1. Extended consolidation: 16 months of sideways movement has worked off excesses and built energy for the next move
2. Improving fundamentals: Both macro and micro (earnings) conditions are on the mend
3. Sentiment drift: Indo-US trade deal has catalyzed positive sentiment after prolonged weakness
“While the macro as well as micro, which means earnings, are on a mend and relatively improving, the sentiment was not good, which probably after the Indo-US trade deal there clearly we are seeing somewhat improvement,” Rajguru explained.
The combination of technical consolidation, earnings recovery, and improved sentiment creates a “very constructive” outlook for equity markets over the next 15 to 18 months, according to Julius Baer’s assessment.
Banking, Financial Services, and Insurance (BFSI) sector is positioned to lead earnings growth in FY27 after experiencing a relatively flat FY26. This setup creates significant upside potential as the sector accelerates from a low base.
“We believe the earnings growth for FY27 will again be led by BFSI. BFSI has had a kind of flattish year this FY26, and FY27 we believe the BFSI earnings growth at an aggregate level would be around upwards of 15%,” Rajguru stated.
Within BFSI, private banks offer particularly attractive risk-reward profiles. Valuations are “okay, they are not out of whack” and if earnings growth materializes as expected, bottom-up stock picking in private banks could deliver strong returns.
The sector’s attractiveness is enhanced by its defensive characteristics during uncertain macro environments, combined with growth potential as credit cycles normalize and net interest margins stabilize after recent pressure.
The consumption sector is poised for a significant comeback, driven by stimulus measures implemented by both the government and Reserve Bank of India over the past six to eight months. This creates a favorable environment for consumer-facing businesses.
“On the consumption side, based on the stimulus which government as well as the RBI has given over last six to eight months, we believe that again would be a clear winner,” Rajguru noted.
Within consumption, Julius Baer identifies two sub-segments with particularly strong potential:
A critical insight from Rajguru challenges the conventional narrative about smallcap valuations appearing stretched. While aggregate index valuations look elevated, this masks significant dispersion and opportunity at the individual stock level.
“While on an aggregate level the valuation would be higher, there would be a bunch of smallcaps and midcaps whose valuations are now much below their historical average,” he explained. “There are a host of stocks which would be trading between 10 to 15 PE and there would be some stocks trading at 50, 60, 70 PE.”
This dispersion creates a “bottoms-up market” for small and midcaps where stock-specific research and selection becomes critical. Investors focusing on aggregate index valuations may miss compelling opportunities in individual names trading well below historical averages.
Rajguru provides a roadmap for how the market rally is likely to unfold across market capitalizations, with distinct phases favoring different segments:
Largecaps will likely outperform as foreign portfolio investor (FPI) flows reverse. International investors typically favor liquid, large-cap names when re-entering markets, creating initial leadership in this segment.
Once FPI flows stabilize, small and midcaps typically catch up and often outperform. “Second half of the year we might see more momentum in small and midcaps, and typically that follows after we see some bit of action in the largecaps,” Rajguru noted.
The current macro setup particularly favors small and midcap stocks, which are more sensitive to overall economic conditions than large caps. Three factors create a supportive environment:
1. Easy/comfortable liquidity: Ample liquidity conditions support risk-taking in smaller names
2. Lower inflation: Controlled inflation improves margins and consumer purchasing power
3. Improving macro: Economic recovery from last year’s disproportionately benefits smaller companies
“During consolidation phases, overall interest level in mid and smallcaps goes lower. Small and midcaps are more impacted by the overall macro,” Rajguru explained. “In a current environment of easy liquidity, lower inflation, and macro improving, small and midcap should do well.”
This creates a reversal from the consolidation period when these segments underperformed due to macro headwinds.
Despite significant budget focus and continued structural tailwinds, Rajguru urges caution on Electronics Manufacturing Services (EMS) stocks due to valuation concerns. The theme remains solid, but entry points matter enormously.
“Even pre-budget there was no issue with the theme. It was very clear — Make in India, PLI, and all those stars were aligned. But there the only discomfort was the valuation”, he stated.
The risk comes from stocks that have been priced to perfection after significant rerating over the past three to four years. In such situations, markets can be “very-very brutal”; when any slight earnings disappointment occurs.
“Big returns go by way of derating and big returns come from rerating. All these stocks got significantly rerated over the last three-four years and were quite well bid. But now a slight disappointment on earnings will be leading to derating” Rajguru warned.
The message: EMS remains attractive selectively and on a bottom-up basis, but investors must be extremely mindful of valuations. Overpaying for even great businesses can lead to poor returns if market expectations aren’t met.
A key point from Rajguru is Julius Baer’s consistent emphasis on bottom-up stock selection rather than broad thematic plays. This approach becomes especially important in markets where valuations vary dramatically within sectors.
“Historically from our side we always look into bottom-up ideas,” he emphasized. “It is not like a market wherein there is one clear segment which looks good, but as I said BFSI and in particular private banks — the valuations are okay, they are not out of whack, and if the earnings growth comes through, there we believe the opportunity is quite good.”
This framework acknowledges that opportunities exist across various sectors, but success requires identifying specific stocks with reasonable valuations and credible earnings growth prospects rather than blindly following popular themes.
Rajguru provides a clear framework for understanding market movements across different time horizons:
“End of the day, the key determinant for markets are fundamentals which is earnings. In the short term, basically sentiments and liquidity determine market conditions,” he explained. The current environment features improving fundamentals, better sentiment post-trade deal, and comfortable liquidity — a rare alignment of all three factors.
Based on Julius Baer’s analysis, here’s s the strategic roadmap for the next 15-18 months:
After 16 months of market consolidation that has tested investor patience, conditions are aligning for a constructive rally over the next 15-18 months. The combination of technical base-building, accelerating earnings growth, and improved sentiment creates a favorable risk-reward setup.
BFSI sector leadership with 15%+ earnings growth provides defensive quality with growth characteristics, while consumer discretionary offers cyclical exposure to stimulus-driven recovery. The key for investors is maintaining discipline around valuations and focusing on bottom-up opportunities rather than chasing popular themes at any price.
The smallcap opportunity is real but requires selectivity — aggregate index valuations mask individual stocks trading at 10-15 PE with solid fundamentals. Investors who can identify these opportunities while avoiding priced to perfection names stand to benefit as the market broadens in the second half.
Perhaps most importantly, the alignment of fundamentals, sentiment, and liquidity — all three key market determinants turning positive simultaneously — creates conditions that have historically preceded strong market performance. The 16-month consolidation may prove to be the foundation for the next significant upward move in Indian equities.
Disclaimer: This report is based on expert market analysis and is intended for informational purposes only. It does not constitute investment advice or a recommendation to buy or sell any securities. Views expressed are those of the interviewee and may not reflect all market perspectives. Investors should conduct their own research, consider their risk tolerance and investment objectives, and consult with financial advisors before making investment decisions.
