Worst of India's earnings downgrades behind us; market valuations more reasonable, says HSBC

Indian equity markets are likely to be in a strong position in 2026 and the worst of earnings downgrades is behind us, HSBC Global Investment Research said in its latest India Equity Strategy report.

"The worst of the earnings downgrades seems to be behind us and recent results have boosted our confidence in the growth outlook. Valuations are now more reasonable, with India’s premium over other emerging markets back to normal levels. We also anticipate more foreign flows as funds look to diversify beyond AI-focused sectors in Asia," HSBC said.

HSBC however, pointed at four factors that could dampen the positive momentum for Indian equities in 2026 and these factors include rising geopolitical tensions, slower growth recovery, AI enthusiasm elsewhere in Asia and currency swings. A trade deal with the US would by positive, but, in our view, it is not essential for the return of foreign investors, HSBC noted.

"We are overweight India in an Asia context; our unchanged Sensex end-2026 target is 94,000, up 11% from current levels," HSBC added.

Rate cuts by the Reserve Bank of India along with tax cuts and lower inflation is likely to boost earnings recovery in the upcoming quarter and optimism from September quarter earnings also supports HSBC's bullish view on Indian equities.

"The September earnings season exceeded expectations, strengthening our belief in the recovery. Moreover, the growth recovery is likely to be broad-based. Financials are a significant contributor. Bank margins are likely to improve from here and there are signs of an uptick in loans. Consumer companies (including autos) see better prospects as well, as demand improves. And tech companies are talking about a better demand environment next year," HSBC said.

Indian equities become attractive for FIIs

Foreign investors have ample headroom to increase their exposure to Indian equities, with ownership levels slipping to a 14-year low after a prolonged period of outflows, HSBC added.

India has largely been a “funding market” for Asia’s artificial intelligence (AI) trade over the past year, prompting investors to rotate out of Indian stocks into Korean and Taiwanese markets. Between September 2024 and November 2025, roughly $28 billion exited Indian equities, pulling foreign ownership down to below 17% of the market.

As a result, India has become the second-largest underweight in global emerging market (GEM) portfolios, with only a quarter of tracked funds holding an overweight position relative to benchmarks. “In short, there is plenty of room for foreign investors to accumulate Indian stocks, especially if attention shifts beyond AI,” HSBC report noted.

Even as foreign investors trimmed their holdings, local investors continued to absorb supply—a trend HSBC analysts describe as “India buys India.” Domestic investors, including mutual funds and retail participants, now account for 21% of domestic holdings, surpassing all foreign investors combined.

This shift marks a structural change in India’s investor base, driven by rising financialisation of savings and still-low market penetration among households.

While domestic flows have become a stabilising force, HSBC analysts say a renewed pickup in foreign inflows will be key for triggering the next decisive bull run.

Cooling valuations

Concerns around India’s premium valuations, a recurring deterrent for global investors, appear to be easing. After a period of relative underperformance, the valuation gap between India and other emerging markets has normalised to historical averages.

Large-cap stocks, typically favoured by foreign institutions, now look particularly attractive, setting the stage for potential re-rating as overseas investors return. Mid- and small-cap stocks still trade at richer valuations, but it argues that these are supported by stronger growth expectations.