With the India–US trade deal easing tariff pressures, FII flows showing early signs of return, and corporate earnings indicating gradual stabilisation, investors are recalibrating their strategies for 2026.

In this edition of ETMarkets Smart Talk, Siddhartha Khemka, Head of Research – Wealth Management at Motilal Oswal Financial Services, shares why the small- and midcap space could remain opportunity-rich — but only for those willing to be selective.

He highlights the importance of earnings visibility, balance-sheet strength and structural growth themes over pure momentum plays, while also outlining the broader triggers that could shape market direction in the months ahead. Edited Excerpts –

Q) We have seen a rollercoaster ride in markets with wild swings post-Budget. How do you see markets in the near term?
A) Indian equities saw sharp swings through early February, with markets correcting on 1st Feb after the Budget-led STT hike triggered a sell-off, stabilising on 2nd Feb amid selective dip-buying, and then staging a powerful rebound on 3rd Feb as optimism around the India-US trade deal drove a broad-based risk-on rally and strong short covering.

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With the trade uncertainty now being lifted, we believe that multiple positives will accrue in the form of 1) reversal of FII outflows, 2) INR recovering its lost ground, 3) general improvement in sentiments towards Indian equities, 4) return of confidence for FDI, and 5) retracement of India’s underperformance vs EM peers.
The US agreed to reduce the reciprocal tariff on Indian imports from 25% to 18% and fully withdraw the additional 25% punitive levy linked to Indo-Russian oil trade, implying a sharp 32% point reduction in the overall tariff burden.India’s tariff rate now stands below several key Asian peers, materially enhancing the competitiveness of its exports to the US. This is likely to support market sentiment, with a multi-layered positive impact on the economy and export-facing sectors.

Following the deal announcement and clarity on the fine print, we expect markets to increasingly recognise the improving trend in corporate earnings, supported by steady upgrades and sequential growth, which should help sustain positive momentum in the near term.

Q) With the Budget, trade deal and MPC out of the way, what are the next big triggers that D-Street investors can look forward to?
A) With several key events largely behind us, markets are likely to transition into an earnings- and liquidity-driven phase. Near-term triggers include trends in FII flows, earnings commentary and key high-frequency indicators such as GST collections, PMI readings (manufacturing and services), auto sales amongst others that signal demand momentum.

Progress on the execution of recently announced trade agreements with the US, and EU, could emerge as an incremental catalyst, as clarity on tariffs, market access and supply-chain realignment may improve export visibility and corporate capex sentiment.

Globally, the trajectory of US rates, bond yields, and AI-led tech spending will remain crucial for risk appetite, while crude oil trends and China’s macro outlook could influence commodities and inflation expectations.

Overall, market direction should increasingly be guided by earnings delivery, global trade and liquidity conditions.

Q) What is your take on the December quarter earnings, which have come through? Are we seeing green shoots?
A) As of 2nd Feb’26, 199/31 companies within the MOFSL Universe/Nifty have announced their 3QFY26 results. The earnings of the aforesaid MOFSL Universe companies/Nifty companies grew 14% YoY (in line with our estimate of 13% YoY) and 7% YoY (vs. our est. of +8% YoY) respectively in 3QFY26.

Overall earnings growth was driven by Metals, which grew 59% YoY; Oil & Gas rose 15%; BFSI grew 8%; Technology rose 12%, and Automobiles increased 18%.

While the quarter was not uniformly strong, it indicated earnings stabilisation, with early green shoots in segments such as banking, metals, industrials, logistics, where volumes and margin trends have steadied after headwinds.

The moderation in cost pressures and signs of volume recovery in key sectors reflect improving demand dynamics. While growth remains gradual, the trend is constructive — especially as sectors with stable balance sheets show resilience.

Increasing clarity on order books, capex plans and consumption metrics provide a better measure of the broad earnings health.

Overall, the quarter suggests a stabilising earnings backdrop, where companies with strong fundamentals and clear earnings visibility are likely to command a premium.

Q) Which sectors are likely to remain in the limelight in 2026, post-Budget, trade deal, etc.?
A) Post the Budget and recent trade developments, sectoral leadership in 2026 is likely to be driven by policy continuity, export tailwinds and a gradual recovery in domestic demand.

The US-India trade deal is expected to have a multi-layered positive impact on the economy and export-oriented sectors. Auto ancillaries, defence, textiles, EMS, consumer durables, gems and jewellery and utilities are likely to be key beneficiaries, while financials could see second-order gains through improved growth visibility.

Meanwhile, under the Union Budget, policy thrust remains firmly tilted toward public capex, with capital expenditure budgeted to rise 11.5% YoY to INR12.2t in FY27E, supporting sectors leveraged to the investment cycle.

Therefore, Capital goods, infrastructure and industrials should remain in focus amid strong execution visibility and sustained government capex. A key highlight was the government’s intent to attract global investment into data centres, which could drive incremental opportunities across digital infrastructure and utilities.

Financials may see steady traction supported by healthy credit growth and stable asset quality, alongside tactical opportunities in capital-market-linked businesses.

Further, pharma and specialty chemicals may remain in the limelight as trade agreements and supply-chain diversification improve export prospects.

Q) How should one play the small & midcap theme this year?
A) The small and midcap theme in 2026 is likely to remain opportunity-rich but increasingly selective, with earnings visibility and balance-sheet strength becoming more important than momentum.

Investors may prefer quality midcaps with strong order books, cash-flow visibility and exposure to structural themes such as manufacturing, capex and exports, while being cautious on crowded pockets where valuations remain elevated.

Given the potential for intermittent consolidation and sector rotation, staggered allocations could be more effective than aggressive positioning. A balanced approach combining selective SMIDs with relatively better-valued large caps may help manage volatility while retaining growth exposure.

Q) How are we placed in terms of valuation among other EM players?
A) As of Feb’26, Indian equities continue to trade at a structural premium to most EM peers, though valuations have moderated meaningfully after the recent consolidation.

The Nifty50 now trades closer to its long-term average of 20.9x, while the valuation gap between MSCI India and broader EM indices has narrowed from peak levels.

Relative to markets such as China, Korea and parts of ASEAN, India remains premium-valued, supported by stronger earnings visibility, domestic liquidity and macro stability.

We believe markets are approaching a valuation inflection rather than a decisive reversal — with improving earnings trends, policy clarity and gradual return of FII flows providing a constructive backdrop.

Q) How are FIIs looking at India? We are seeing some buying coming back towards Indian equities.
A) FII sentiment toward India appears to be gradually improving, with flows turning more constructive following the India-US trade deal announcement and greater clarity on policy risks.

The FIIs have turned net buyers in February so far (up till 10th Feb) after persistently selling for the past seven months. The reduction in tariff uncertainty, coupled with India’s relatively resilient earnings outlook and macro stability, has helped restore confidence among global investors.

While positioning remains selective, FIIs are increasingly viewing India as a structural growth market within emerging markets, supported by steady earnings visibility and improving export competitiveness. Further, any stability in global rates and currency trends could further accelerate inflows.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)

Wally is the founder and President of Wallace R. Weitz & Company. Wally, a Chartered Financial Analyst, manages Hickory Fund and Partners III Opportunity Fund and co-manages Value Fund and Partners Value Fund.
Wally’s investment career began in 1961, at age 12, when he invested the profits from various entrepreneurial ventures. After going through a charting phase in high school, Wally discovered Benjamin Graham’s Security Analysis and was converted to value investing. After earning a B.A. in Economics at Carleton College in 1970, Wally spent three years in New York doing security analysis, primarily on the small companies in which G.A. Saxton made over-the-counter markets. In 1973 he joined Chiles, Heider & Co., a regional brokerage firm in Omaha, where he spent ten years as an analyst and portfolio manager. In 1983 he started Wallace R. Weitz & Company, and now heads a group of eight investment professionals that manages approximately $2 billion. Wally’s approach to value investing has evolved over the years. It combines Graham’s price sensitivity and insistence on a “margin of safety” with a conviction that qualitative factors that allow companies to have some control over their own destinies can be more important than statistical measurements, such as historical book value or reported earnings. Wally has the good fortune to be paid to pursue his favorite hobby, investing, but he also enjoys golf, skiing, tennis, reading, and working with charitable and educational foundations. Wally is on the Board of Trustees for Carleton College and serves on the Executive Committee of Building Bright Futures in Omaha.

A gauge including Tata Consultancy Services Ltd. and Infosys Ltd. has shed $56 billion in combined market value since Anthropic PBC released a tool seen as a threat to their business models. The slide in Indian tech firms has stood out in Asia, a region whose large hardware industry is seen as indispensable to the AI ecosystem.

Analysts at HSBC Holdings Plc and JPMorgan Chase & Co. said worries may be overdone, as Indian IT firms stand to gain from more customers requiring help integrating artificial intelligence into their operations. Investors including PPFAS Mutual Fund say the sector will be able to flexibly respond to changes.

“Every time there’s a technological shift, IT companies have adapted, reskilled their staff and ensured client needs are being met,” said Raunak Onkar, research head and fund manager at $17 billion PPFAS, which added shares of Indian software makers to its portfolio last month. The companies have had success because they can quickly offer affordable knowhow, he added.

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The optimism shows how some investors are betting that the recent selloff in India’s software companies has the potential to reverse. Technology stocks have been roiled globally by worries over the impact of AI tools on businesses, particularly, those that are built on winning productivity gains for companies.

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The NSE Nifty IT Index has slumped 15% since Anthropic’s announcement earlier this month, on track for its worst month since March 2020. While software-heavy Chinese and Australian tech stocks have also been hit, losses have been a particular concern in the cohort that was seen as a flagbearer of India’s growth story.
The nation’s IT outsourcers rose to prominence in the late 1990s by helping Western companies solve the Y2K bug, which had threatened computer chaos at the turn of the millennium. Since then companies have survived fluctuations in global growth from a series of crises, as well as the dawns of new technologies from mobile telecommunications to cloud computing.Now the software business model is seen at risk of obsolescence from the rise of AI and robotics. But analysts like Stephen Bersey at HSBC see such views as “flawed and illogical.”

“To optimally unlock the potential of the ‘generated’ information that AI produces, software is needed to orchestrate the overall digital interactions between AI and non-AI system enterprise components,” he wrote in a note dated Feb. 9. “India based companies have had the ability to create and market enterprise class software for decades … at scale.”

Skeptics are particularly worried about the potential for AI’s productivity improvements to eat into earnings for IT outsourcers. For Phanisekhar Ponangi, co-founder of Mavenark Asset Managers Pvt., “the scare is real.”

“Over the last 30 years, IT businesses succeeded by saying they would improve productivity,” he said. The industry is set for a big change as AI compresses project timelines and reduces the number of workers needed, while “the client will pocket the productivity gains.”

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Others argue that the sector has seen what’s coming and is prepared. Companies are increasingly talking about AI on their earnings calls, and even disclosing related revenues. TCS in January said AI solutions now generate $1.8 billion in annualized revenue for the company and are growing at around 17% quarter-on-quarter.

Manu Rishi Guptha, a portfolio manager at MRG Capital, said the market is also overlooking two cushions for Indian IT firms: large cash piles that can fund shifts as AI disrupts business models, and a relatively young workforce that can adapt quickly.

The stock meltdown may actually be an “opportunity in disguise,” Guptha said, adding that the industry is seeing resilient order flows and share valuations have dropped. The Nifty IT gauge is trading at 20 times forward earnings estimates, the lowest level since April 2023.