Oct 31, 2025
Macro resilience | Early earnings pickup visible
So far in 2025, markets have been shaped by an earnings slowdown, heightened geopolitical tensions, and rising global economic frictions, including India’s own border challenges. Yet amid these headwinds, the country has displayed notable resilience across key macroeconomic indicators.
The September quarter reinforced India’s macro resilience despite global policy uncertainty. Domestic growth drivers, lower inflation and interest rates, reduced income tax, goods and services tax, and improving credit flow, remained intact. However, FII flows turned negative again, with $9.3 billion of outflows after a positive first quarter, while SIP flows continued their record streak.
Markets witnessed profit-booking following the stellar June-quarter rally. Large caps offered relative stability, while mid- and small-cap segments corrected after strong gains. After two months of declines, the Nifty 50 ended September on a positive note. Notably, the Auto Index, Metal Index, and PSU Bank Index gained 11.2%, 5.3%, and 4.5% respectively during the quarter.
Key Drivers during the quarter:
• Festive demand improved sequentially, with auto dispatches and retail footfalls showing a buoyant pre-Diwali cycle after GST reclassification.
• September 2025 was the first full month of the additional 25% US tariff impact, with textiles, jewellery, and marine exports most affected.
• The earnings downgrade cycle narrowed sharply in 1QFY26, with Q2 likely marking the bottom.
• CPI fell to an eight-year low of 1.54%, maintaining real rate comfort and leaving room for further cuts.
• Over the past quarter and six months, market trends were broadly in line with expectations, and the performance of our strategies versus their benchmarks is summarised below:
As on 30th September 2025
As highlighted in our June-quarter update, the economic outlook has turned positive, supported by a slew of government and central bank initiatives over the past 6–9 months. On earnings, we are likely bottoming out in 2QFY26 and see growth resuming in the second half of the fiscal year.
Earnings Outlook:
Initial Q2FY26 results point to stronger-than-expected economic traction, despite it being one of the weakest quarters of the fiscal.
• Cement, steel, and cables players reported volume growth ahead of expectations.
• Loan growth was stronger than expected, led by larger banks.
• Consumption was mixed: media, quick commerce, and premium food fared well, while staples and some discretionary segments were hit by GST-related supply chain issues.
• Software services exports growth was weak, though slightly better than expected.
• Incremental upgrades have come mainly from banks and financial services.
Here is the summary of results declared so far
Source: I-Sec Securities
Broader market valuation remains elevated
Among the three market-cap segments, valuations, though off their peaks, are still high for small- and mid-cap indices, while the Nifty 50 trades near its average. Earnings rebound will be the key driver of returns, particularly in the small- and mid-cap segments.
Source: Bloomberg, Sanctum Wealth
Market Outlook and Portfolio View
Portfolio performance has shown clear traction. Here is the six-month attribution of the top five contributors and detractors.
Our portfolio positioning remains aligned with the themes we have consistently highlighted:
• Exposure to lenders, select NBFCs, banks, and regulated utilities benefiting from credit revival and lower funding costs.
• Maintain allocation to retail and consumption themes, supported by tax reforms, wage growth, and festive demand.
• Energy and power sectors remain in a structural uptrend, driven by data-centre expansion and the green energy transition.
• Tactical allocations in commodities and export-oriented segments will be considered, particularly those dependent on the US market, where a trade deal could end uncertainty.
The macro environment continues to reflect underlying resilience, supported by accommodative monetary policy, benign inflation, and clear government intent to drive income-led domestic demand. While FIIs remain cautious amid global uncertainties, slowing earnings, and relatively higher valuations, strong domestic flows, particularly through SIPs, continue to provide support.
The narrowing downgrade cycle, together with a strong start to the Q2FY26 earnings season, sets the stage for growth acceleration in the second half of the fiscal year. Early results point to resilient volume growth in cement, steel, cables, and bank credit. Alongside visible demand and margin improvements in select discretionary segments, supported by the upcoming 8th Pay Commission, this backdrop creates a favourable environment for bottom-up stock selection heading into CY26.
We are beginning to see clear improvements in the performance of our in-house strategies. We believe momentum has now shifted in their favour, going forward.
Here is how our flagship strategies have performed over different time periods.
Portfolio Performance
