2026 may deliver double-digit equity returns: Sunil Subramaniam

After a year marked by sharp divergences across market segments, 2026 could turn out to be a year of broad-based recovery and renewed optimism for Indian equities. According to Sunil Subramaniam, equity markets are likely to deliver double-digit returns next year, with leadership expected to shift decisively towards midcaps and smallcaps, while largecaps continue to offer stability.

“So, the equity markets on a broad basis should deliver double-digit returns next year which is a very big contrast because you had largecaps probably deliver high single digits and midcaps much lesser and smallcaps actually negative,” Subramaniam said. “So, we are going to see a reversal of that and while largecaps will continue to provide stability of let us say 11% to 12% returns, I think that the midcaps and smallcaps are going to outperform the largecaps in the coming year.”

He noted that the extent of this outperformance will hinge significantly on global developments, particularly the much-anticipated trade deal. While domestic growth drivers remain strong enough to sustain momentum even without it, a positive outcome could materially alter the flow of foreign capital.

“The second, of course, is that the scale of this outperformance depends on the trade deal happening,” he said. “I think that this kind of a level of outperformance can happen even without trade deal really happening but if the trade deal happens, I expect FII flows to return in a big way and that could give a major boost to the export-oriented sectors.”

In the absence of a trade breakthrough, Subramaniam believes domestic-facing sectors will continue to anchor the market. “Otherwise the domestic sectors around discretionary consumption and to some extent capital goods will drive the story for next year,” he said, adding that exports could deliver an additional kicker if global uncertainties ease.

Turning to sectoral leadership, Subramaniam highlighted discretionary consumption as a multi-layered opportunity playing out across the year. He pointed out that while the GST impact was initially visible in auto stocks, its broader influence will unfold steadily through 2026.

“See, the GST impact actually came through in the last quarter and was largely centred around the auto space both as a market as well as in the sales front. But the real impact of the GST will be felt in the broader discretionary consumption pack through the whole of 2026,” he explained. Autos are expected to see strength early in the year, followed by a seasonal pickup in consumer durables. “It will start off with auto sales being strong in the first quarter… Then, in the summer you will get your cooling related durables like refrigerators, air conditioners, coolers, those will get a pickup which will last right through June,” he said.

One of the strongest calls for 2026, however, is real estate — a sector that has lagged the broader market despite multiple tailwinds. Subramaniam believes this underperformance masks a powerful turnaround story.

“But I think that there is a hidden story there,” he said, pointing to GST cuts on construction inputs, cumulative RBI rate cuts, and improving affordability. He expects affordable housing to emerge as a key theme as developers respond to renewed demand and improving financing conditions.

“So, realty will get a pickup because on top of this you have the GCC story also continuing which is positive for realty and the fact that REITs a key source of financing for the realtors has now got equity status,” he noted. “So, I expect mutual funds to allocate more money to REITs now and which will give a very good source of funding. So, I am very bullish on the realty space.”

Beyond consumption, Subramaniam also sees a gradual revival in private capital expenditure as capacity utilisation improves. With top-line growth expected to accelerate following GST reductions, he believes utilisation levels could cross a critical threshold.

“When that happens, private capex will get a pickup,” he said, adding that capital goods — particularly engineering-focused players — could be early beneficiaries in the second half of the year.

Finally, the backbone of this cycle, according to Subramaniam, will be the financial sector. Banks and NBFCs are expected to play a central role in funding consumption, real estate and capex, with public sector banks standing out despite their strong recent performance.

“Credit growth is going to outpace deposit growth, so there is going to be good margins for banks especially PSU banks which focus a lot on the SME and MSME,” he said. While acknowledging that valuations have already moved up, Subramaniam believes the structural credit growth story remains intact.

“I know the sector has done very well last year, PSU banks have delivered 24% one-year return, but the story is good enough for the next two to three years,” he added, underscoring banking and financial services as a core portfolio anchor for 2026.