Market strategy: Largecap valuations attractive, RBI rate cuts may spur FY26 rally: JM Financial; Check top stock picks | Stock Market News

Stock market strategy: The Indian stock market benchmark indices, Sensex and Nifty 50, declined over a percent each on Monday, weighed down by weak global cues. The Union Budget 2025-2026 failed to impress the domestic equity market, but gave a boost to the consumption stocks.

The benchmark Nifty 50 has corrected over 11% from its record high level, amid sustained selling by foreign institutional investors (FII), concerns over high valuations and weak domestic corporate earnings growth.

After this double-digit correction, analysts believe that the market seems to be less expensive. Additionally, the balanced fiscal approach of the Union Budget 2025-2026, potential repo rate cuts by the Reserve Bank of India (RBI), and attractive large-cap valuations are expected to be key drivers for FY26. JM Financial outlines a cautiously optimistic outlook for the Indian stock market.

Budget FY26: Striking the Right Balance

The biggest takeaway from Budget FY26 is the government’s success in boosting middle-class consumption through tax reductions without sacrificing fiscal discipline. JM Financial suggests this disciplined fiscal stance could be a strategic move to encourage the RBI to initiate a rate cut cycle, potentially starting as early as February 2025.

Nifty 50 EPS Growth: Strong FY26 Outlook

Nifty 50 earnings per share (EPS) growth for FY25 has been revised downward to 3.8%, by JM Financial, reflecting a lackluster performance in the first half of the fiscal year. The first two quarters saw modest YoY growth of 5.5% and 4.2%, respectively, with Q3 numbers also trailing expectations.

However, JM Financial is optimistic about FY26, forecasting an 18.3% EPS growth. This optimism is rooted in several factors: tax relief measures supporting urban consumption, an expected revival in the rural economy due to favorable monsoon conditions, and sustained government capex growth.

Valuations Turn Attractive Post-Correction

The recent stock market correction has made large-cap stocks more attractive. The Nifty 50, Nifty Midcap 100, and Nifty Smallcap 100 indices have dropped by 12%, 14%, and 16% from their recent peaks in Q3FY25.

“Valuations are relatively less expensive now with Nifty50 large cap valuations having dipped below +1 sd. Interestingly, the bond yield premium above earnings yield suggests the market is cheaper than what the Nifty 50 P/E multiples suggest. Midcap and small cap valuations still seem expensive even though earnings growth might be stronger in these names vis-à-vis large caps,” JM Financial said.

Rate Cuts on the Horizon

JM Financial anticipates the RBI will commence a shallow rate cut cycle of 50 basis points (bps) to 75 bps in 2025, starting from February. The appointment of a new RBI Governor and a favorable inflation outlook — expected to ease to 4.5%-4.6% — support this expectation. Additionally, the RBI’s recent liquidity measures, including bond purchases and repo operations, signal preparations for a rate cut environment.

Top stock picks post Budget

JM Financial’s top stock picks post-Budget FY26 include Reliance Industries, Bajaj Finance, DLF, Havells India, Tata Consultancy Services (TCS), Larsen & Toubro, HDFC Life Insurance Company, SRF, Bharti Airtel, Sun Pharmaceutical Industries, Hindalco Industries, BHEL, ITC, Maruti Suzuki India, Godrej Consumer Products and KPIT Technologies.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.