Nifty valuations near average; earnings upside likely from banks, manufacturing: Aditya Kondawar

Core Viewpoint - Indian equity markets are expected to deliver positive earnings surprises over the next one to two years, particularly in the banking, manufacturing, and auto-linked sectors, despite recent volatility in headline indices [9]. Banking and Financial Services - Banking and financial services are identified as the backbone of India's economic expansion, with expectations of increased demand for housing loans, retail credit, and corporate borrowing as the economy moves towards a $7–8 trillion target [3][9]. - Private sector banks are preferred, with select public sector banks also seen as valuable. There is growing foreign institutional investor interest, indicated by significant transactions involving banks like RBL Bank and IDFC First Bank [9]. Manufacturing Sector - Manufacturing is highlighted as a key theme, with strong capital expenditure (capex) intentions from companies, benefiting the entire ecosystem as capex cycles gain momentum [6][9]. - The opportunity in manufacturing extends beyond original equipment manufacturers (OEMs) to the entire supply chain [6]. Small and Mid-Cap Stocks - Small- and mid-cap stocks have faced a challenging period, described as "death by a thousand cuts," but are expected to recover as market stability improves over the next two to three months [7][10]. - A broader recovery in this segment is anticipated to be catalyzed by progress on trade agreements, with expectations for a comprehensive India-US trade deal [10]. Market Valuations and Growth Expectations - The Nifty index is currently trading at approximately 24 times earnings, close to its long-term average, with the market factoring in 10–12% earnings per share (EPS) growth over the next two years, although there may be upside surprises [1][9]. - Government measures such as tax cuts and initiatives to spur consumption are expected to support earnings momentum across various sectors [2][9].