This chart suggests India’s stock market lag against peers may reverse soon

India’s relative underperformance phases have not lasted beyond two years historically, even as calendar year 2026 marked the third consecutive year of underperformance. The odds are in favour of a reversal, YES Securities in its latest strategy note said.

Long-term comparisons of India versus global equity returns showed that periods of underperformance tended to be cyclical rather than structural. Since the 1990s, phases of lagging returns were typically followed by sharp rebounds, often when macro conditions, earnings cycles, or liquidity trends shifted.

“The current phase resembles past trough periods, where valuation compression and capital outflows preceded renewed investor interest. This historical pattern strengthens the case that India’s current lag may reflect cyclical positioning rather than deterioration in fundamentals,” YES Securities said.

The domestic brokerage said the current weakness in Indian market reflects valuation compression, reduced index weights, and shifting global capital flows rather than structural deterioration. Valuation premiums have moderated toward long-term averages, lowering risk and improving long-term attractiveness, it said.

India’s share in global market capitalisation and EM indices has declined, while underlying fundamentals profitability, growth potential, and corporate strength, remained robust, YES Securities said. 

"A key near-term constraint is that India’s short term forward earnings growth lags the broader emerging-market surge, which may delay recovery. Overall, the market appears to be in a consolidation phase rather than a long-term downtrend, with potential upside if earnings momentum improves or global capital rotates back," it said.

India has traditionally traded at a premium valuation relative to both emerging markets (EM) and the global average. But the premium has moderated recently toward historical averages. The India-vs-EM forward P/E spread and India-vs-World spread have both declined from elevated levels seen in 2023-2024, reflecting partial mean reversion. 

"This moderation suggests that valuation risk has reduced, making Indian equities less stretched than during previous peaks. From a portfolio allocation perspective, this normalization can improve the risk-reward balance for long-term investors," YES Securities said.

YES Securities said comparative analysis of expected earnings growth versus return on equity shows that India remains among the global leaders in profitability and growth potential, alongside markets like the United States and Korea. This positioning indicates that underlying corporate fundamentals remain robust, suggesting the recent equity weakness is more likely driven by valuation compression and capital flow dynamics than by deterioration in earnings quality or economic prospects, it said.