10% earnings cut: Edelweiss AMC CIO sees a rebound only in second half of FY26

Earnings have seen a 10% downgrade for FY25, affecting large-, mid-, and small-caps alike, said Trideep Bhattacharya, president and chief investment officer-equities at Edelweiss Asset Management Company Ltd, which oversees equity assets totalling nearly ₹23,000 crore.

This broad-based reduction suggests a gradual recovery, rather than an immediate rebound, he said, adding, “We anticipate earnings growth to pick up in the second half of FY26 (2HFY26) as economic conditions stabilize.”

Edited excerpts:

Despite an ongoing debate over continuing systematic investment plans (SIPs) in small- and mid-cap funds and the valuations in broader market running hot, small- and mid-caps are often the go-to option for superior returns when discussing growth. What is your take on this?

In our view, markets are currently differentiating between beta and alpha within the mid- and small-cap segments. Over the past four years of strong market conditions, two distinct types of stocks have delivered significant gains:

Beta or narrative stocks: companies that align with prevailing market themes or popular narratives but possess inherently weak business models with structural vulnerabilities; and alpha or genuine growth stocks: companies with robust business models and earnings growth prospects that meaningfully outpace those of large caps.

Read more: No, FPI selling is not an exodus. But then why is it hurting so bad?

As liquidity tightens, equity markets are recalibrating valuations across these two categories. We believe that in the current volatile environment, choosing the right approach of “active, bottom-up stock-picking—focused on identifying true alpha opportunities”—remains crucial, rather than a broad withdrawal of capital from markets.

We believe so, as risk-off phases like the current one often triggers broad-based corrections driven by sentiment. However, investors who stay committed to the second category of stocks during this downturn are likely to be rewarded significantly as the market gradually rebounds over time.

Which three sectors do you see as the strongest bets for 2025, and what makes them stand out?

While we believe, bottom-up stock picking is the way forward, IT services, NBFCs (non-bank financial services companies) and consumption sectors could do well in 2025. IT services is strengthened by improving business prospects in the US and further supported by INR (rupee) depreciation, boosting export revenues. Meanwhile, NBFCs are likely to benefit from falling interest rates over the next 12–15 months, improving credit demand and profitability, and consumption is set to gain from the ₹1 lakh crore tax rebate announced in the Union Budget 2025, driving higher discretionary spending.

These sectors are well-positioned to capitalize on macroeconomic tailwinds, offering compelling investment opportunities.

The biggest myth about SIP cancellations is that stopping SIPs during market downturns prevents losses. In reality, SIPs help mitigate price risk through time arbitrage.

What is the biggest myth about SIP cancellations that you would like to debunk? How do you interpret the current trend in SIP cancellations?

The biggest myth about SIP cancellations is that stopping SIPs during market downturns prevents losses. In reality, SIPs help mitigate price risk through time arbitrage.

Our study shows that the risk of capital loss declines significantly with a longer investment horizon, dropping from about 10% at five years to less than 1% at ten years. However, to benefit from this, investors must stay invested for the long term.

Furthermore, after analyzing SIP trends in India over the past decade, we find that cancellations are typically short-lived, correcting within three months—excluding covid-19, they have persisted beyond this only four times.

What’s the latest trend you are observing in not only Indian equities but also across markets globally?

A major trend shaping both global and Indian equities is de-globalization, as countries shift focus toward domestic industries, self-reliance, and supply chain resilience. Rising trade barriers and geopolitical tensions are reshaping global trade patterns, impacting sectors dependent on international markets.

Another critical trend is the polarization of profit pools, where industry leaders with strong fundamentals, market dominance, and efficient capital allocation are capturing a far higher proportion of sectoral profit pool today, than 10 years ago. Meanwhile, weaker competitors are marginalised at a faster pace and struggle with margin pressures and market share erosion.

Additionally, business cycles are becoming shorter, driven by rapid technological advancements, changing consumer behaviouur, and macroeconomic fluctuations. This accelerating shift demands a more agile investment approach, focusing on resilient, high-quality companies that can adapt to evolving economic and market conditions.

Have you raised your cash holdings or remained fully invested? What’s the strategy behind your approach?  

We remain fully invested, maintaining cash holdings up to 5% at all times, as per our company policy. We believe that timing the market is extremely difficult, and attempting to do so often leads to missed opportunities rather than enhanced returns over the business cycle.

Instead of trying to predict short-term market movements, our strategy focuses on active stock-picking, identifying high-quality businesses with strong fundamentals and long-term growth potential.

This disciplined approach ensures that we stay invested through market cycles, allowing us to capitalize on value creation over time. Our conviction lies in stock selection rather than cash positioning, ensuring optimal portfolio performance.

With foreign portfolio investors (FPIs) offloading equities significantly, do you anticipate a reversal anytime soon?

We surmise that three key factors would influence FII investment behaviour: dollar stability, clarity on tariffs and trade barriers, and an improving earnings scenario. A more predictable US monetary policy and reduced volatility in the dollar could restore investor confidence and drive flows back into emerging markets like India.

Additionally, clarity on tariffs and trade barriers under Trump regime will be crucial. As geopolitical tensions stabilize and trade policies become more transparent, investors will gain better visibility, reducing risk aversion. Finally, India’s improving earnings scenario remains a strong pull factor. Robust domestic demand, resilient corporate earnings, and structural growth drivers could attract FPIs back into Indian equities, especially as global liquidity conditions improve and risk appetite returns.

Increased infrastructure spending is expected to boost corporate earnings, while rising disposable incomes and policy support will fuel consumption demand.

Earnings have faced a de-rating–when do you anticipate a rebound in growth for FY26, and what factors will drive it?

Earnings have undergone a 10% downgrade for FY25, affecting large, mid-, and small-caps alike. This broad-based reduction suggests a gradual recovery, rather than an immediate rebound. We anticipate earnings growth to pick up in the second half of FY26 (2HFY26) as economic conditions stabilize.

The twin engines driving this recovery will be government capital expenditure (capex) and consumption. Increased infrastructure spending is expected to boost corporate earnings, while rising disposable incomes and policy support will fuel consumption demand. As these factors gain momentum, earnings growth should accelerate, restoring investor confidence and supporting market valuations over the medium term.

With the developments in the US being closely tracked, how do you expect the rupee and dollar to move, and what is driving your outlook?

We anticipate a gradual depreciation of the rupee over the next few years, driven by evolving global macroeconomic conditions. The extent of this depreciation will largely depend on US fiscal policies, particularly tax cuts and growth stimulus measures.

If the US implements aggressive fiscal expansion, it could lead to a stronger dollar, exerting downward pressure on the rupee. Additionally, persistent current account deficits and global risk sentiment will influence currency movements. However, India’s strong forex reserves and policy interventions may help limit excessive volatility. Overall, while depreciation is expected, its pace and magnitude will be shaped by US economic policies and global liquidity trends.