Earnings recovery, FII revival: 5 factors that will shape Dalal Street’s next move after Q2

Indian equities are showing signs of a recovery, with improving corporate earnings and a tentative turnaround in foreign investor flows offering support to the market after a prolonged spell of volatility.

The Nifty 50 has staged a strong recovery, gaining 9% in November alone to trade at 25,044 levels, as investors assess the improving earnings outlook and the possibility of foreign institutional investors (FIIs) returning to Indian equities.

The optimism comes against the backdrop of better-than-expected corporate earnings, upgrades to FY27 estimates and signs that foreign portfolio investor (FPI) selling may be losing momentum. However, whether these developments translate into a sustained market rally will depend on several domestic and global factors.

“Corporate earnings have significantly exceeded expectations, prompting upgrades to FY27 estimates. The resilience of the Indian economy and a rebound in consumer demand have helped companies absorb higher input costs and price hikes,” said Vinod Nair, Head of Research at Geojit Investments.

However, Nair cautioned that earnings upgrades remain modest, reflecting expectations of margin consolidation amid inflationary global supply-chain pressures and a high-base effect on domestic demand.

Against this backdrop, 5 factors are likely to shape the next leg of the market’s trajectory.

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1. Earnings recovery and the FY27 outlook

The improvement in corporate earnings has emerged as one of the key supports for Indian equities. Better-than-expected results have prompted analysts to revise their FY27 earnings estimates, with domestic demand resilience helping companies navigate higher input costs.

The recovery in consumer demand has also provided support to corporate performance, although concerns around margins and the high base of domestic demand remain.

Jefferies, in a report by Abhinav Sinha, Priyank Shah and Aditi Singla, noted that supportive domestic macroeconomic indicators, including healthy festive auto sales, robust power demand and credit growth, had contributed to a 1.5 percentage point upgrade in MSCI India’s earnings estimates since the end of June 2026.

The sustainability of these upgrades, however, will be important in determining whether the earnings recovery can provide a stronger foundation for market gains.

2. FII flows: Is the tide finally turning?

After an extended period of selling, foreign portfolio investors have started returning to Indian equities, raising hopes of a possible reversal in capital flows.

According to Jefferies, FPIs have recorded net inflows of $8.2 billion since mid-October, including $5.8 billion in just six trading sessions in November 2026.

This marks a potential shift after foreign investors withdrew $61 billion from Indian equities between September 2024 and September 2026. The first 10 months of calendar year 2026 also witnessed substantial outflows of $31 billion, according to the brokerage.

Motilal Oswal Financial Services, meanwhile, said FIIs sold $2.2 billion worth of Indian equities in October, following the sharp sell-off in September. However, foreign investor activity recovered strongly in the second half of October.

The brokerage also highlighted that domestic institutional investors (DIIs) continued to provide support, investing $6.3 billion in Indian equities during October and extending their buying streak to 39 consecutive months.

The key question now is whether the recent improvement in FII activity marks the beginning of a sustained reversal or remains a temporary recovery in flows.

3. Global AI trade and geopolitical developments

The direction of global capital flows could also play an important role in determining the outlook for Indian equities.

Concerns over the sustainability of investments in artificial intelligence infrastructure and capital expenditure have triggered volatility in global markets, particularly those with greater exposure to AI and technology stocks.

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Jefferies believes a moderation or broadening of the concentrated AI trade could encourage investors to increase allocations towards India.

The brokerage pointed to the sharp correction in MSCI Korea from its June 2026 peak and rising bond spreads of hyperscalers as signs of growing questions around AI capital expenditure.

Motilal Oswal Financial Services also noted that concerns over elevated bond yields, higher crude oil prices and uncertainty surrounding the US midterm elections had dampened global risk appetite in October.

For India, any moderation in the global AI trade could potentially redirect foreign capital towards relatively underperforming emerging markets.

Geopolitical developments will remain another important variable. Vinod Nair said an easing of geopolitical risks could improve FII sentiment towards India.

“An easing of geopolitical risks could improve FII sentiment toward India. The global AI sell-off may also benefit India as a non-AI theme with limited direct exposure to a slowdown in the AI rally,” he said.

However, he also cautioned that broader emerging-market capital flows could face spillover effects.

4. Valuations and the case for large caps

After the correction from their 2024 peaks, Indian equity valuations have become more reasonable, particularly in the large-cap segment.

Jefferies said the Nifty 100 was trading at 18.6 times one-year forward earnings, around 5% below its 10-year average.

The brokerage believes large caps could be the more direct beneficiaries of any revival in foreign flows, given their higher liquidity and greater foreign investor ownership.

Its analysis of 70 large active emerging-market funds, with combined assets under management of $370 billion, showed that India had an overweight position of just 0.1 percentage point as of September 2026, significantly below its 10-year average of 2.2 percentage points. As many as 61% of the funds were underweight on India.

The brokerage believes the relatively light positioning leaves room for foreign investors to increase their exposure if sentiment improves.

Nair also sees large caps benefiting from a potential reversal in FII selling.

“Large caps are likely to be the immediate beneficiaries of any reversal in FII selling, supported by attractive valuations and a stable earnings outlook along with sustained domestic inflows from institutional and retail investors,” he said.

5. Sectoral flows and stocks that could benefit

The distribution of foreign investor flows across sectors and stocks will be another important factor to watch.

Motilal Oswal’s analysis showed that Financial Services, Automobiles and FMCG faced the sharpest FII selling in calendar year 2026 so far, with outflows of $13.2 billion, $4.9 billion and $4.5 billion, respectively.

In contrast, Services, Metals and Capital Goods attracted inflows of $1.4 billion, $1.3 billion and $1.1 billion, respectively.

October also saw a divergence in sectoral flows. FIIs sold $1 billion each in FMCG and Financial Services and $800 million in Automobiles. Technology and Telecom, on the other hand, attracted inflows of $1.4 billion and $700 million, respectively.

Jefferies has identified several stocks that could benefit from a reversal in foreign investor positioning, including Reliance Industries, HDFC Bank, Axis Bank, Kotak Mahindra Bank, Max Healthcare, JSW Energy, UltraTech Cement, Varun Beverages, DLF, Indian Hotels and Sona BLW.

Its analysis found that FPI ownership in BSE 500 companies had declined to a 10-year low of 17.3%, compared with 19.6% in September 2024.

Max Healthcare and Axis Bank witnessed some of the sharpest declines in foreign ownership, at 17 and 13 percentage points, respectively, over the September 2024-September 2026 period.

The brokerage believes stocks that have seen a significant decline in foreign ownership could attract renewed interest if global investors increase their India allocations.

Motilal Oswal Financial Services also noted that easing FII selling in large-cap-heavy sectors had supported the relative outperformance of large caps over mid- and small-cap stocks in October.

What lies ahead?

The combination of improving corporate earnings, more reasonable valuations and signs of a recovery in foreign flows has strengthened the outlook for Indian equities.

Motilal Oswal Financial Services said India’s healthy macroeconomic fundamentals, strong corporate earnings, correction in valuations from their 2024 peaks and robust domestic liquidity could encourage a more sustained revival in FII interest, particularly if the global AI trade moderates.

However, the sustainability of the recovery will depend on the pace of earnings upgrades, global risk appetite and whether the recent improvement in foreign investor flows gathers momentum.

For now, the focus will remain on whether improving fundamentals can translate into sustained foreign participation and support the next leg of India’s equity market recovery.

Disclosure: This article has been written by Kumar Gaurav, who is not a Sebi-registered Research Analyst or an Investment Adviser. Gaurav and their ‘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 disclaimers here