The Q3 earnings season has largely met expectations, with strong performance in mid and smallcap companies, according to market experts. In a discussion with ET Now, Vikas Khemani, from Carnelian Asset Management, highlighted that the earnings momentum remains intact.

“Now, we have been saying in our previous discussion, in our previous interaction that we have been very positive on the earnings outlook and that is what has happened, in last two quarters sequentially earnings have been better. So, by and large earnings have been in line with the expectations and even especially in the mid and smallcap space earnings have been very good and nothing changes from our perspective. We think this momentum will continue,” Khemani said.

He added that recent resolutions in the US trade deal and tariff uncertainties have further bolstered corporate confidence, especially among exporters in the mid and smallcap space.

Reflecting on the broader market outlook for 2026, Khemani expressed optimism. “I have said in our previous discussion that 2026 would be a better year than 2025 for the simple reason. If you see, we started 2025 with a lot of negativity or noise or negative news… When all these things were happening, India was going through a significant monetary stimulus as well as the fiscal stimulus and that was obviously working very well at the economic level. There was uncertainty around a little bit of on the export due to tariffs which also has got lifted. Also, in this crisis what India has been able to do is FTAs, long pending FTAs with the other countries, likes of EU and the New Zealand and other parts of the world. So today, we are sitting on a situation where you have good monetary and economic stimulus and all the broader uncertainties are behind. There will always be uncertainty in the market something or other, there is no doubt on that, but broadly there is not much uncertainty on the growth and as more and more people get comfortable around this environment and meanwhile in this period the valuations have come down, a lot of froth which has got kind of cleared, so you will see markets doing well. Now, how much it does well it all depends a lot more on the liquidity which I think should get better this year especially from the foreign investor perspective. So, I am quite optimistic about the market in 2026.”

When asked about the lagging mid and smallcap sectors, Khemani explained that recovery typically starts with largecaps before extending to smaller companies. “It always happens that once the recovery happens it always led by the largecaps and the mid and smallcap follows through… A) they tend to accelerate. I mean, the volatility in the earning with the change in the macro environment generally tends to be far more pronounced than in any largecap or large company and that happens in the share prices as well. So, I am quite optimistic that this environment is going to be good for mid and smallcap. Now whether it really meaningfully picks up in two months, three months, six months, I do not know but directionally we are finding interesting ideas, risk-reward looks very good.”

On investment strategy, Khemani emphasized stock-specific valuations rather than broad index levels. “See, looking at the broad indices cannot be the right answer, you have to look at individual stock specific and you have to see in the context of the potential growth… So, always you have to see valuation in the context of the growth and the ROEs business model company generates and that is how we always evaluate, we do not get carried away by the broader noise and you have seen over the years how our stock picks have been… we have never believed only in the consensus calls, we have taken contra… I mean against the consensus calls but once we are convinced about the potential growth and the risk-reward of the story, then we do take the sizable bets.”
Khemani also discussed the consumption sector, highlighting selective exposure in consumer discretionary stocks, automobiles, and auto ancillaries. “Like I said that it is linked to the macro environment which we saw last 12 to 18 months and with that lag it happened… in last six-eight months we have meaningfully kind of played that out especially in a consumer discretionary space, even automobiles we take as part of the consumption and that we have fairly large exposure… you look at companies, what are the growth drivers, you do not necessarily play only the first order impact, you can play also second order impact where you understand the risk-reward given the valuations.”Looking ahead, Khemani confirmed a focus on mid and smallcaps within his portfolio. “We have product which is more mid and smallcap focused, we have flexicap product where we are definitely right now almost 60% mid and smallcap… Some of the spaces which could stand out in this year would be chemicals… Auto, auto components look pretty decent. The building materials product looks very decent. So, consumer discretionary space you can find lots of ideas. Within banking and financial services you are finding… we think that is more likely to play out. So again, you look at different-different segments… line towards AI related enabled companies, there we are kind of playing out more.”

With optimism around earnings, macro stability, and selective sector plays, experts like Khemani suggest that 2026 could offer better opportunities for investors, particularly in mid and smallcap spaces, while staying alert to market volatility.