After a year marked by sharp divergences across market segments, 2026 could turn out to be a year of broad-based recovery and renewed optimism for Indian equities. According to Sunil Subramaniam, equity markets are likely to deliver double-digit returns next year, with leadership expected to shift decisively towards midcaps and smallcaps, while largecaps continue to offer stability.

“So, the equity markets on a broad basis should deliver double-digit returns next year which is a very big contrast because you had largecaps probably deliver high single digits and midcaps much lesser and smallcaps actually negative,” Subramaniam said. “So, we are going to see a reversal of that and while largecaps will continue to provide stability of let us say 11% to 12% returns, I think that the midcaps and smallcaps are going to outperform the largecaps in the coming year.”

He noted that the extent of this outperformance will hinge significantly on global developments, particularly the much-anticipated trade deal. While domestic growth drivers remain strong enough to sustain momentum even without it, a positive outcome could materially alter the flow of foreign capital.

“The second, of course, is that the scale of this outperformance depends on the trade deal happening,” he said. “I think that this kind of a level of outperformance can happen even without trade deal really happening but if the trade deal happens, I expect FII flows to return in a big way and that could give a major boost to the export-oriented sectors.”

In the absence of a trade breakthrough, Subramaniam believes domestic-facing sectors will continue to anchor the market. “Otherwise the domestic sectors around discretionary consumption and to some extent capital goods will drive the story for next year,” he said, adding that exports could deliver an additional kicker if global uncertainties ease.

Turning to sectoral leadership, Subramaniam highlighted discretionary consumption as a multi-layered opportunity playing out across the year. He pointed out that while the GST impact was initially visible in auto stocks, its broader influence will unfold steadily through 2026.

“See, the GST impact actually came through in the last quarter and was largely centred around the auto space both as a market as well as in the sales front. But the real impact of the GST will be felt in the broader discretionary consumption pack through the whole of 2026,” he explained.

Autos are expected to see strength early in the year, followed by a seasonal pickup in consumer durables. “It will start off with auto sales being strong in the first quarter… Then, in the summer you will get your cooling related durables like refrigerators, air conditioners, coolers, those will get a pickup which will last right through June,” he said.