Foreign portfolio investors (FPIs) have already pulled nearly ₹8,423 crore from domestic equities in June. This outflow follows ₹19,860 crore and ₹4,223 crore of inflows in the preceding two months, respectively. FPIs remain net sellers for the year, and experts anticipate further outflows if the conflict extends.

“FPIs are free birds and aren't under any compulsion to buy stocks at specific prices to support the counter like we do," said Apurva Sheth, head of market perspectives and research at SAMCO Securities. “Their latest position in the derivatives segment shows that they are heavily bearish on the Indian stock market."

But experts also say such concerns might be transitory as India still offers the best growth story in an era of global slowdown.

“India’s macro fundamentals are head and shoulders above any other top 10 economy in the world," said Vikas Gupta, chief executive and chief investment strategist at OmniScience Capital. “From GDP growth numbers to inflation control, building forex (foreign exchange) reserves to maintaining forex stability, even controlling the fiscal and current account deficits, from all angles we are one of the strongest worldwide."

Naturally, India has been commanding a premium over its global peers, particularly in the previous five years. The benchmark Nifty 50 is trading at 23.3 times its one-year forward earnings estimate, a level that, while having moderated, sits closer to September when the domestic markets had peaked, Bloomberg data indicates.

A premium valuation made sense in the past because Indian Inc’s earnings grew at a compound annual growth rate (CAGR) of about 24% in the last four years, said Jaiprakash Toshniwal, fund manager and senior equity research analyst at LIC Mutual Fund Asset Management. “(However,) we need to keep in mind that earnings growth is expected to be in the lower double digits in the medium term based on consensus estimates," he added.

Still, that would be a step up from India Inc’s performance in 2024-25, which was mostly dismal throughout the fiscal year. According to a recent Kotak Institutional Equities report, Nifty 500 companies reported a 5% year-on-year (y-o-y) sales growth in Q4FY25, although net profit grew 7%, mainly aided by benign raw material prices and cost-cutting measures, it said.

Also read | India Inc’s report card: Headwinds take a toll in Q4

A glass half full

A broad-based future earnings downgrade suggests that demand woes will persist in the economy for some time. Yet, on the macro front, Ranju Rajan, head of managed accounts at Axis Securities, insists the Reserve Bank of India’s ongoing liquidity measures, including a 100 basis-point rate cut this year, and a pickup in government capital expenditure will spur economic growth in FY26 and FY27.

Echoing this optimism, Seshadri Sen, head of research and strategist at Emkay Global, said India will see the effects of monetary and tax stimuli playing out this financial year, particularly in the second half. 

“Next year, we will see an upward revision in the government’s pay commission, and then tech-related hiring will pick up from 2027," Sen said, adding that these factors will pave the way for a consumption revival. “So I think we are at the bottom of a medium-term consumption cycle."

Ample liquidity in the market has also been pushing up India’s valuation premium, according to Sheth of SAMCO Securities. 

“DIIs (domestic institutional investors), including mutual funds, are investing ₹1,300 crore in the Indian market almost daily, creating a situation where huge liquidity is chasing fewer stocks, resulting in their premium valuations" he said.

But rising crude oil prices due to the ongoing Israel-Iran conflict may weaken the arguments for India’s high valuation, Kotak Institutional Equities said in its report. If crude touches $90-100 per barrel, it can derail any hopes of India Inc’s earnings recovery in FY26, as raw material costs would go up significantly, noted experts.

Also read | Israel-Iran conflict: How will rising crude oil prices affect India?

This bearish outlook, however, finds a counterpoint in the views of some analysts. 

“We have seen that 90% of the time crude reacts much more than the actual event," said Sumit Pokharna, oil and gas analyst at Kotak Securities. “The situation definitely remains fragile, but global demand for crude is falling and there is enough supply to keep price rises in check."

As a result, several experts expect that high crude oil prices might not sustain for long. But sectors dependent on oil, such as paints, tyres, petrochemicals, automobiles, and even consumer goods, might see a dip in earnings for a quarter before bouncing back for the broader part of FY26.

For now, “insurance, cables and wires, renewable energy, and select pharma companies offer promising return potential from a growth and valuation standpoint", said Ajit Mishra, senior vice president of research at Religare Broking.

These sectors are backed by compelling long-term themes of under-penetrated markets, a private capex revival, strong government-led infrastructure push, global energy transition commitments and changing demographics of the country, Mishra said.

Meanwhile, India’s equity market on Thursday barely reacted to the US Federal Reserve’s decision to keep US benchmark interest rates unchanged at 4.25-4.5% as this was in line with expectations.

Also read | Israel vs Iran could be worse for markets than Russia vs Ukraine. Here’s why.