Worst is over for Indian markets, 2026 set for outperformance: Sandeep Tandon

Indian equity markets have passed their worst phase and are poised to become relative outperformers in 2026, according to Sandeep Tandon, Chief Investment Officer at Quant Mutual Fund. In an exclusive conversation with ET Now, Tandon highlighted that extreme negativity has subsided, foreign selling has exhausted, and the rupee depreciation cycle has peaked;creating a constructive environment for stock-specific opportunities across market capitalizations.

Market sentiment shifts from extreme negativity to hope

Analyzing market behavior following major events including the EU developments, India-US trade deal, union budget, and RBI policy, Tandon observed that extreme negativity is settling down with a ray of hope returning to investors. The market has entered a consolidation phase where the worst appears to be over, though the best is yet to begin.
Trading activity is picking up as impact costs normalize, and investors are returning to markets with renewed confidence. Tandon emphasized that buying and selling are ultimately driven by behavioral perspectives; when investors are in a relaxed, positive mood, they tend to participate on the long side. He views the current environment as an opportunity for portfolio rebalancing.

Smallcaps and midcaps: Correction from lack of buying, not selling pressure

The CIO provided crucial context for understanding the carnage in mid and smallcap segments, noting that corrections occurred with low volumes rather than extraordinary selling pressure. Stocks fell not from active selling but from a complete disappearance of buying interest, which caused participation to plummet and impact costs to surge.
This dynamic is now reversing, with investors beginning to look at beaten-down names and recognize value opportunities. While Tandon does not expect an immediate spark or dramatic upward movement, he sees a constructive background emerging for both smallcap and midcap spaces, particularly for smallcaps. The key lies in identifying stocks with potential to move up significantly from current levels.

Sentiment damage exceeded earnings impact in mid and smallcaps

Addressing earnings performance, Tandon clarified that earnings disappointment in the mid and smallcap universe was not particularly meaningful. The real damage came from sentiment rather than fundamentals. The psychological impact far outweighed any actual earnings miss, and this sentiment-driven trend is now reversing.
Investors should look for opportunities to participate rather than maintaining a negative mindset that nothing will improve. The phase of extreme pessimism has changed, and market participants should take advantage of the now-visible opportunities.

Pharma remains long-term bull case with generic focus

Tandon maintained his constructive stance on the pharmaceutical sector, particularly generics, despite the space not performing to expectations recently. The uncertainty surrounding trade relations has been settling down following the India-US trade deal, where pharma and generics were completely exempt from tariff considerations.

Beyond the exemption itself, the multiple trade deals being signed provide psychological relief for overseas companies dealing with Indian pharmaceutical firms. This treaty background creates comfort not just for US markets but for other countries as well. With earnings disappointment limited to a few names and broader numbers remaining decent, Tandon remains a long-term bull on the pharmaceutical space.

FII selling exhaustion signals cycle reversal

On the critical question of foreign institutional investor flows, Tandon’s predictive analytics indicate selling exhaustion by FPIs with high confidence. The extraordinary selling witnessed over the past six quarters has peaked out, releasing the intense pressure that characterized recent periods.

Rather than getting excited about one or two days of positive data, Tandon emphasized the importance of recognizing the broader cycle reversal. This shift is crucial for sustainable market recovery and indicates that the worst of foreign selling pressure may be behind Indian markets.

Rupee depreciation cycle peaked near 92 mark

Currency movements significantly impact FPI returns, as depreciation directly reduces their overall calculations. Quant Mutual Fund’s macro analysis suggests that the USD-INR pair has peaked around the 92 mark, meaning the depreciation cycle has concluded or is in its final phases.

The rupee now has potential to appreciate, but more importantly, it needs to stabilize first. RBI measures are helping achieve this stability, which will act as a catalyst for FII flows. Tandon clarified that FIIs do not necessarily need a stronger rupee;they need a stable rupee. Combined with an improving macro picture and settled US trade uncertainty, the headwinds that plagued recent periods are dissipating.

India’s risk appetite Correction sets up 2026 outperformance

Indi’s risk appetite has corrected substantially and is now approaching the lower end of the range, according to Tandon’s analysis. This positioning increases the probability of markets moving up from current levels given the constructive setup and improved liquidity dynamics.

Money shifts on a relative basis between markets. While regional equities and US markets remain strong currently, Tandon expressed caution on global equities broadly, though he differentiates between global and regional dynamics. When these strong markets correct meaningfully, India, having been a laggard and underperformer will be the beneficiary.

Capital flows from high-risk areas to low-risk areas during global corrections. With India’s risk appetite on the lower side, the country is positioned to attract flows when global markets face pressure. Despite significant underperformance that may make current optimism seem contrarian, Tandon believes the background and construct are perfect for India to be a relative outlier with outperformance expected in 2026.

IT companies can evolve into AI enablers and adapters

Addressing concerns about Indian IT companies being on the receiving end of anti-AI trade sentiment, Tandon acknowledged that India missed the opportunity from an AI tools and product
development perspective during the initial wave. However, he sees potential for transformation in the sector.

Implementing AI solutions requires services that current IT companies are well-positioned to provide. Some Indian IT firms have the potential to become AI enablers, as these tools and processes need customization and adaptation. Existing IT companies will perform this crucial enabling function, shifting from pure IT services to AI implementation specialists.

While not advocating immediate buying, Tandon indicated he will look for opportunities at appropriate times. He is not overly negative from current levels and expects the narrative to evolve toward recognition of these companies as AI enablers and adapters rather than just traditional IT service providers.

IT sector awaits inflection point, not specific price targets

When pressed on whether IT represents a timing or valuation opportunity, Tandon explained that his firm does not operate by pinpointing specific levels. Instead, they believe in inflection points; extreme turning points that are difficult to project precisely as being 8% or 10% lower.

Those inflection points have not yet been reached, suggesting more correction may be needed in both price and time. However, investors cannot afford to be short on these names or maintain an extremely bearish mindset, as doing so will cause them to miss the opportunity when it arrives. The approach requires settling the negativity and being prepared to add IT stocks meaningfully to portfolios at the appropriate inflection point.

Capex cycle peaked, Consumption theme preferred

Contrary to expectations for a capex cycle pickup, Tandon believes the capex cycle has actually peaked out from a medium-term perspective. It may be premature to call for another upswing, as the current government’s focus has shifted toward consumption;an area that had been neglected.

GST reform and income tax reform are moving in directions aimed at boosting consumption. Rather than being extraordinarily bullish on the capex cycle, Tandon prefers playing consumption themes in the current difficult environment. This does not imply negativity on infrastructure; he remains constructive on large infrastructure names that have also corrected and offer meaningful opportunities. The preference hierarchy simply favors consumption over capex when choosing between themes.

Playing consumption: FMCG, food processing, and stock-specific approach

Consumption represents a broad theme requiring stock-specific analysis rather than blanket sector allocation. Tandon highlighted select FMCG names and food processing companies as particularly interesting, with the latter being major beneficiaries of GST changes.

Within consumption, the auto sector has already completed one round of strong performance. Given the breadth of the consumption universe, investors must identify specific opportunities rather than buying the entire space indiscriminately. Valuations in consumption are not universally cheap or at obviously attractive levels, requiring a relative basis approach focused on sectors showing relative underperformance combined with visible growth opportunities.

Key takeaways for investors

Tandon’s comprehensive market outlook provides several actionable insights for investors navigating 2026:

Market sentiment has shifted from extreme negativity to cautious optimism, creating a constructive environment for stock-specific opportunities. The worst of corrections in smallcaps and midcaps stemmed from lack of buying rather than active selling, and this dynamic is reversing. FII selling exhaustion and rupee stabilization near the 92 mark against the dollar remove major headwinds that pressured markets in recent quarters.

Sector-wise, pharmaceuticals and generics remain long-term bullish bets with favorable trade dynamics. IT companies await an inflection point but offer future potential as AI enablers. Consumption themes are preferred over capex plays given government policy focus, though large infrastructure names remain constructive. Most critically, India’s relative underperformance and low risk appetite position the market for outperformance in 2026 when global markets face pressure.

The overarching message: extreme negativity has passed, creating selective opportunities for investors who can identify inflection points and maintain appropriate conviction without succumbing to either excessive pessimism or premature enthusiasm.