Dalal Street investors went through a roller-coaster ride in 2025 as their resilience was tested amid improving domestic fundamentals and global uncertainty, prompting them to adopt a selective approach rather than broad-based buying, leading to divergent performance in the Indian stock market.

Retail investors moved away from their once-favoured small-cap stocks amid multiple earnings-per-share (EPS) downgrades by analysts, as earnings in the segment remained weak, causing the Nifty Smallcap 100 index to drop 5.6% in 2025, marking its first annual drop in two years.

While signs of earnings improvement emerged in both mid- and large-cap segments during the recently concluded September quarter, gains were largely capped due to sustained selling pressure from overseas investors. Even so, the Nifty 50 managed to end the year with a 10.6% gain, extending its winning streak to a tenth consecutive session.

Despite foreign portfolio investors (FPIs)₹1.6 lakh crore in 2025″> selling equities worth ₹1.6 lakh crore in 2025, according to NSDL data, domestic institutional investors stood firm, absorbing the entire outflow. In fact, they purchased domestic equities at 20 times the amount sold by FPIs.

Domestic institutional investors, largely mutual funds, bought equities worth ₹79,619 crore in December, taking total inflows for 2025 to a record ₹7.81 lakh crore, according to exchange data.

Amid strong support from the DIIs, the Nifty 50 scaled to a fresh all-time high of 26,325 in late November, which came after a gap of 14 months.

Indian markets lag global peers in 2025

Although the Nifty 50 delivered a healthy gain in 2025, it sharply underperformed its key Asian peers, many of which surged between 16% and 70%. The underperformance was so pronounced that Indian equities also lagged Pakistan, which rallied over 50%

Pakistan’s KSE 100 index rallied 51.20% in 2025, not only outperforming Indian markets but also emerging as one of the best-performing equity markets globally. The rally was driven by the country’s smaller market size, IMF support, and domestic rate cuts that boosted liquidity.

Among other global markets, South Korea’s KOSPI topped the charts with a strong 75.63% surge. Other Asian peers, such as China, Hong Kong, and Japan, also delivered returns two to three times higher than the Sensex, rising 21%, 28%, and 28%, respectively, over the year.

The US market also posted solid gains, with the broader S&P 500 index advancing 17.25%, while the UK’s FTSE 100 rose 22%.

Indian market well-positioned for strong rally in 2026, say analysts

While higher US tariffs on Indian imports remain a concern, market sentiment has improved in recent months amid an earnings recovery, strong GDP growth, easing domestic inflation, and recent policy measures announced by both the RBI and the government, which have strengthened the earnings outlook.

This improving backdrop has not only lifted domestic sentiment but has also prompted global brokerage firms to turn bullish on Indian equities, with JPMorgan and Goldman Sachs adopting a positive stance on the market.

Domestic brokerage Axis Securities believes key headwinds—such as weak corporate earnings, stretched valuations, and tariff-related concerns—that weighed on market sentiment are likely to ease next year.

The brokerage expects 2026 to be more constructive for Indian stock market, with the market transitioning from a phase of valuation-led consolidation to an earnings-driven cycle. Axis Securities has set a Nifty 50 target of 28,100.

Motilal Oswal also remains positive on Indian stock market and believes the equities is well positioned to recover from the underperformance seen in CY2025, supported by improving earnings visibility, supportive domestic macroeconomic conditions, and an easing geopolitical environment.

Disclaimer: This story is for educational purposes only. 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.