Budget 2026: Why market may shift from broad rallies to stock-specific bets

Indian equity markets are entering the Union Budget 2026 at a point where optimism is being tempered by selectivity. After a phase of broad-based participation driven by liquidity, macro stability and improving earnings, market expectations are becoming more measured. The forthcoming Union Budget is therefore less likely to trigger a blanket rally and more likely to reinforce a market environment where returns are driven by company-specific fundamentals rather than index momentum.

A key shift we expect is transition in policy emphasis from stimulating consumption to enabling production, reflecting a broader economic pivot from a ‘Buy India’ approach to a ‘Build India’ agenda. While last year’s Budget focused on boosting household spending through tax reforms, GST rationalisation and income support measures, the policy narrative going forward will move towards capital expenditure (Capex) as the primary growth engine. The objective is to convert the gains from higher disposable incomes into a sustained supply-side expansion, positioning India for durable growth rather than cyclical consumption-led spurts.

The emphasis will be on continuity in manufacturing policy, strengthening domestic manufacturing capabilities, expanding infrastructure capacity and creating higher-quality employment. Within this framework, Capex is expected to be anchored around three interlinked priorities: indigenisation, infrastructure and income creation. Moving up the manufacturing value chain beyond assembly, lowering logistics and connectivity costs, and generating stable, productivity-linked employment are emerging as central themes. Areas such as roads, railways, defence manufacturing, logistics and renewable energy are expected to benefit from policy continuity. Urban infrastructure and affordable housing may also receive support through allocations and incentives.

Programmes such as production-linked incentives are expected to deepen, with attention extending to newer segments such as semiconductors value chain and data centre infrastructure, while continuing the earlier. In parallel, sustained policy support for agriculture remains critical, both to ensure rural stability and to secure raw material availability for the industrial ecosystem. Infrastructure spending is also expected to remain elevated, reflecting the government’s intent to strengthen physical and digital backbones that support industrial growth and creating a favourable environment towards acceleration in private Capex.

However, the market impact of these policy priorities is unlikely to be uniform across sectors or companies. As policy support becomes more targeted, differentiation at the company level is expected to sharpen. Execution capability, balance sheet strength, capital efficiency and earnings visibility will increasingly determine which businesses translate policy direction into sustainable growth. In such an environment, index-level performance may mask significant dispersion in stock-level outcomes.

Fiscal discipline will be the market’s primary barometer which investors will closely monitor, a commitment to the consolidation path will keep bond yields stable and funding costs predictable.

Within financials, differentiation is expected to persist. Institutions with improved asset quality, conservative underwriting standards and strong capital positions are better placed to navigate a selective market phase. While credit growth opportunities exist, especially alongside a capex-led recovery, markets are likely to reward balance sheet resilience and disciplined risk management rather than aggressive growth alone.Overall, the forthcoming Union Budget is expected to reinforce a market environment where returns are shaped by alignment with policy priorities, balance sheet strength and execution quality. As markets move further into an earnings-driven phase, investors may benefit from focusing on businesses that can convert policy intent into cash flows and profitability, rather than relying on broad-based rallies driven by sentiment or liquidity.

(The author is Chief Investment Officer, Systematix Group)