Indian equities are at risk of another year of underperformance, following a disappointing 2025. The Nifty index returned only 9% last year, its worst showing relative to emerging market peers in three decades. This underperformance has carried into 2026, with Nifty slightly down while the broader MSCI Emerging Markets Index has risen about 5%.

The outlook remains challenging due to rich valuations and demanding earnings expectations. Despite a slight cooling from recent peaks, Indian equity valuations remain elevated by historical standards. Analysts worry that this leaves little margin for error if growth or earnings disappoint. Additionally, the Nifty has limited exposure to global market themes, particularly the current AI boom, which is favoring markets with direct exposure to hardware and semiconductors.

Supporters argue that strong GDP growth and improved structural fundamentals, such as a healthier banking system and greater policy stability, justify higher valuations. However, these positives are increasingly well-priced. Markets like South Korea and Taiwan offer more attractive risk compensation, while China's supportive policy stance towards its technology sector also works in its favor. These markets are better positioned to benefit from the global surge in AI-related capital spending.

Analysts forecast earnings growth of around 16% for Indian companies, which, while above long-term averages, may be difficult to achieve given the economic context. Imports from India into the United States face the highest effective tariff rate among major economies, potentially limiting any positive impact on equity markets.