Nifty 50 earnings grew only 3% year-on-year in the first quarter of FY26, much lower than the expected 11% growth. This sharp slowdown has raised investor concerns about potential earnings downgrades. Analysts have now revised annualized growth estimates down to 9%.
Key Reasons Behind Weak Q1 Earnings
- US Federal Reserve’s policy: The Fed’s pause on interest rate cuts hurt global discretionary spending, which impacted India’s IT sector.
- Shift in IT outsourcing: US banks are moving IT operations in-house through
Global Capability Centres (GCCs), reducing outsourcing contracts for Indian IT firms. - US Tariffs: The Trump administration’s 25% tariff and an additional 25% secondary tariff have made nearly half of India’s US export basket uncompetitive, particularly affecting apparel and leather sectors.
As a result, nearly 60% of Nifty 50 companies are expected to struggle in meeting their FY25
earnings per share (EPS) targets.
Bright Spot: Consumer Goods Sector
On a positive note, consumer goods companies reported encouraging results.
Urban demand has improved due to income tax relief, while strong monsoon rains have boosted rural consumption.
Additionally, a possible GST rate rationalization could add Rs 12,000–18,000 annually to household disposable income, further supporting demand.
Market Valuation and Outlook
Currently, the Nifty 50 trades at 22.5x FY26 earnings.
If earnings growth sustains at 9% and the index re-rates to 25x forward price-to-earnings (PE), the Nifty has an upside potential toward 27,500 levels.
Smallcaps Slide, Midcaps Shine in Q1 Earnings
In Q1, smallcap companies saw their earnings fall 11% compared to last year, with nearly half (46%) of them missing analysts’ estimates, according to Motilal Oswal’s review of 132 firms. The decline was mainly led by private banks, NBFCs, insurance, oil & gas, and automobile sectors. On the other hand, midcap companies performed strongly, posting 24% earnings growth and continuing a two-quarter winning streak across most sectors.
The Nifty index reported modest, single-digit growth for the fifth straight quarter, with just five companies—Bharti Airtel, Reliance Industries, SBI, HDFC Bank, and ICICI Bank—accounting for 77% of the overall earnings growth. This underperformance led to a 2% cut in Nifty-50 FY2026 earnings estimates. Analysts are optimistic for the second half of the year, expecting a boost from a good monsoon, improved liquidity, lower interest rates, and GST reforms, which could support consumption. Motilal Oswal recommends keeping a 70% allocation in large caps while increasing midcap exposure from 16% to 22%.
