December, 2025

Tryst with Uncertainty

Mohit Dugar, CFA

Accepting uncertainty is becoming the new norm in today’s scenario. All the previous assertions are proving to be futile; market also seems to have moved on despite what is happening in the macro environment. The broad indices Nifty and Sensex touched a new all-time high of 26,256.65 and 86,026 respectively after 14 months of correction and consolidation amidst all the volatility, but it is not a bull market yet.

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Most of the sectoral and broad-based indices are now either trading close to their 10-year average P/E or at a slight discount. Large-caps are priced much more attractively as compared to Mid-caps and Small-caps based on historical 10-year average P/E. However, the earnings growth momentum is being driven by Mid and Small-caps in Q2FY26.

However, the earnings momentum growth is being driven by Mid and Small-caps in Q2FY26 with 15% year-on-year profit growth (NIFTY 500) driven by Metals and Oil & Gas. Breadth of growth was good as 17 out of 30 sectors recorded double-digit sales growth. Nifty 100 companies posted a modest 9% YoY PAT growth in Q2FY26, while Mid and Small-cap segments stole the spotlight with a robust 30%+ YoY increase.

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The surge in Mid and Small-cap earnings was fuelled by strong performances from NBFCs, Metals, Oil & Gas, and Pharmaceuticals. Mid-caps and Small-caps delivered growth of 29% and 21% YoY, respectively. Notably, the profit pool dynamics are shifting with Large-cap contribution to Nifty 500 earnings tapering over recent quarters, driven by the outperformance of Mid-caps. Mid-cap contribution rose from 15% in Q4FY25 to 19% in Q2FY26, while Large-Cap share declined, highlighting the broadening earnings base beyond the top 100 companies.

CPI Inflation fell down to a record low of 0.25% and core inflation was around 4.4% mainly due to bullion demand. Low inflation gives RBI more headroom to cut rates and gives a boost to consumption; also low inflation combined with low interest rates tend to be a tailwind for equity valuations. When rates fall, the discount rate used in valuation models declines, making future cash flows more valuable today and pushing up intrinsic valuations.

India’s trade deficit has hit a record high of $41 billion in Oct’25 due to a fall in exports because of US tariffs and a record high import due to huge demand of bullion. INR is also flowing out leading to a steep depreciation against USD due to FIIs outflow, high valuations, high import bill and uncertainty regarding India-US trade deal. INR touched an all-time low of 90.42 before recovering a bit.

Silver is showing resilience as it has bounced back and given a return of around 30% in just 1 month. All eyes now remain on the FED FOMC meet on 9^th and 10^th December. Analysts are anticipating an 89% chance of a rate cut. If it materialises there is a chance for more upside, around 10% for silver from current prices with a target of $63-$65.

The Indian Government is also focusing on several policy measures to boost domestic manufacturing of specialised products (like semiconductors). The foremost being Design Led Incentive (DLI) scheme being launched on the same lines as the PLI scheme. The Government is also focusing on building rare earth manufacturing capacity and has launched the REPM scheme under which it has set aside ₹7,280 crore to reduce dependence on China in this segment.

On the international front, the US shutdown which started on 1^st October finally ended on 12^th November, after 43 days – the longest in US history.

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Even in the middle of all this noise, the Indian economy stands tall and has logged in a GDP growth rate of 8.2% in Q2FY26. The RBI has also raised the GDP growth projection to 7.3% from earlier estimates of 6.8% for FY26. This shows the depth of the economy. However, the catalyst for the next bull run still remains an impending US-India trade deal which is still on the negotiation table. For the time being domestic participants have held the market despite rampant FII selling. But, in order to see a new rally, FIIs are crucial – their entry will also lead to INR stabilising a bit.

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It is a matter of time before FIIs enter again, earnings are improving, macro environment is also becoming more accommodative. But, for now, the street has embraced uncertainty and having patience will be the biggest virtue. Stay invested!

www.pinnaclefinvest.com

mohit@pinnaclefinvest.com

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