Benchmark indices have remained in a consolidation phase over recent months; however, strong earnings growth in the broader market continues to present medium- to long-term investment opportunities, according to Ankit Patel, Co-founder and Partner at Arunasset Investment Services.
“Consolidation has removed excesses, particularly in the broader market. In terms of index valuations, we’re generally near historical averages,” Patel stated. He expressed confidence that earnings growth in the small and midcap sectors is likely to exceed expectations.
In the last quarter, the Nifty Midcap 150 and Nifty Smallcap 250 reported nearly 30% year-on-year EPS growth, with brokerage estimates projecting over 25% earnings growth for smaller companies in FY27. Patel emphasized that actively managed and concentrated investment strategies are expected to outperform, as opportunities are becoming increasingly stock-specific rather than reliant on index trends.
Midcaps Rally on Earnings Support
Patel noted that the rise in the Nifty Midcap 100 index has predominantly been driven by earnings rather than pure valuation metrics. “The PE ratio has increased significantly, but earnings have supported this rise,” he remarked. The Q4 results clearly illustrated that midcap earnings growth has been around 30% year-on-year, providing a solid fundamental backing for the rally.
He highlighted that concentrated and actively managed strategies, such as PMS products and actively managed small- and mid-cap funds, are poised for better performance over the medium term.
Domestic Investors Continue to Support Markets
Strong participation from domestic institutional investors (DIIs) has been a major factor in maintaining market resilience, Patel pointed out. In the October-December 2025 quarter, DIIs invested ₹2.09 lakh crore in equities, averaging nearly ₹70,000 crore monthly. After the market correction on February 28, DIIs became even more aggressive, purchasing ₹1.43 lakh crore in March alone.
“This indicates that large domestic investors did not panic during times of uncertainty; instead, they utilized the correction as an opportunity to invest,” Patel explained. He added that DII buying slowed to ₹51,064 crore in April after a sharp market rebound, with the Nifty 50 rising 7.5%, the Nifty Midcap 100 gaining 13.6%, and the Nifty Smallcap 100 advancing by 18.4%.
“This suggests that investors were more aggressive at lower prices and more restrained after the rebound,” he noted.
FPI Sentiment May Improve on Earnings Recovery
A sustained recovery in earnings might eventually reverse foreign portfolio investor (FPI) outflows from Indian equities. FPIs have withdrawn over ₹2.2 lakh crore from Indian equities in the first five months of 2026, amid concerns regarding slowing earnings growth and high valuations.
“FPIs will return when earnings rebound,” Patel said. “If we can achieve another strong quarter, FPIs will need to reassess the Indian market.” He highlighted that earnings growth in the small- and mid-cap sectors was about 25% year-on-year in Q3, improving to nearly 30% year-on-year in Q4. “In my view, the worst of FPI selling is likely behind us,” he added.
Weak Monsoon Remains a Key Risk
Regarding the outlook for the monsoon, Patel mentioned that an average or slightly below-average monsoon would be manageable for the economy unless rainfall distribution proves unfavorable. He cautioned that prolonged dry spells in key agricultural regions could lead to increased food inflation and adversely affect rural consumption across sectors like tractors, two-wheelers, fast-moving consumer goods (FMCG), and rural credit.
“For the markets, the initial reaction may be sentiment-driven. However, unless the monsoon proves significantly deficient, earnings and liquidity will have a larger impact,” Patel observed. He stated, “A normal-to-average monsoon would be neutral; conversely, a poorly distributed monsoon could negatively affect rural demand and inflation sentiment.”
Published on May 29, 2026
