“It doesn’t really feel like the markets have reached new highs,” observed Manish Sonthalia, Emkay investment managers Noted that while the frontline indices have surpassed the previous peak of 26,277 since September 2024, the gains have not come down evenly. “There is some distance where midcap stocks are yet to reach and there is some distance where smallcap indices are yet to reach all-time highs. So, there is a lot of pain in the broader markets.”
Sonthalia pointed out that while index heavyweights—especially in banking—have strong holdings, midcaps and smallcaps continue to lag behind. However, earnings momentum is encouraging. They expect revenue growth of 15-16% next year, with a two-year CAGR of 13-14% by FY26-27. He believes this could push the Nifty 50 by around 15-16% in the next 12 months. “The real excitement in the markets will come when the midcap index and the smallcap index see a bit of green, a bit of deep green,” he said.
A major reason for the underperformance of the broader markets is liquidity stress. According to Sonthalia, a significant portion of money is shifting from the secondary market to the primary market, where IPO activity has increased. With a ₹40,000-crore issuance pipeline in December aloneFunds are being diverted.
“The smallcap segment is a very large universe,” he explained. “There is a liquidity problem. Liquidity in the system is tight… Valuations for mid and smallcaps have come down significantly. But the whole thing will get better… once liquidity comes back into the system or there is no excessive bunching of IPOs.”
Looking ahead, Sonthalia expects rate-sensitive sectors to lead the next phase of earnings growth. “The rate sensitivities are at a very sweet spot… whether it’s banks, NBFCs, insurance, real estate, automobiles,” he said.
With inflation—both CPI and WPI—comfortably low, they believe India is headed for a low rate cycle. While he acknowledged the possibility of a pause in the next policy decision due to currency pressures, he added that a 25-bps cut at the next policy meeting looks increasingly likely. “You cannot keep the spread between US rates and Indian rates too low,” he pointed out.
On the macro front, he acknowledged concerns over falling tax collections and slow GDP growth. “The problem for the Indian economy is not the real GDP growth rate but the nominal GDP growth rate,” he said. He believes that achieving 10% nominal growth is challenging in the current low inflation environment.
However, they expect stronger activity in Q3 and Q4, aided by government-led consumption measures including income-tax and GST cuts and the upcoming 8th Pay Punch-linked payouts. “They are on course to meet their full-year targets… In the third quarter and the fourth quarter you will see an increase in economic activity and that will result in better receipt collections,” he said.
Despite the headline highs, the market’s next phase will depend heavily on liquidity and broad participation – which is missing for now.
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