(MENAFN- IANS) New Delhi, Nov 28 (IANS) India's financial markets are heading into 2026 with renewed confidence, riding on the back of a decisive rebound in October and a macroeconomic environment that continues to demonstrate resilience despite global uncertainties, a report said on Friday.

After three months of subdued movement, benchmark equity indices surged, with the Nifty 50 and Sensex recording gains of 4.5 per cent and 4.6 per cent respectively -- their strongest performance in several months.

This sharp turnaround was fuelled by multiple domestic triggers, including the GST 2.0 rate rationalisation that accelerated consumption across discretionary categories, a surge in manufacturing activity reflected in a two-month high PMI of 58.4, and the return of foreign institutional investors, who turned net buyers after a prolonged phase of outflows, PL Capital said in its report.

The signing of the Trade and Economic Partnership Agreement (TEPA) with EFTA nations added further momentum by opening tariff-free access to key European markets, strengthening India's long-term export prospects.

Equity markets are now supported by a combination of strong domestic demand, resilient corporate balance sheets, and macro stability.

"While the short-term outlook remains largely range-bound, the overall market tone is upward-biased given the low inflation environment of around 1.5 per cent, improving earnings visibility and record government capital expenditure, which rose more than 43 per cent year-on-year during April-August," the report noted.

Sectors such as banking, oil and gas, metals, telecom, and autos saw meaningful foreign inflows in October, indicating a shift towards domestic cyclicals with stronger earnings potential.

However, according to the report, valuations provide limited room for error, with the Nifty's forward price-to-earnings ratio rising to 22.9 times, mid- and small-cap segments trading at premiums to long-term averages, and ongoing pressure from IPO and QIP supply.

These factors, coupled with persistent currency volatility and global uncertainty around trade negotiations and geopolitical tensions, suggest that investors may need to adopt a more selective approach in the coming months.

"As India steps into 2026, the country stands at a strategically advantageous point, buoyed by improved macro fundamentals, strong domestic demand, and a host of structural reforms that continue to support long-term growth," said Inderbir Singh Jolly, CEO, PL Wealth Management.

Despite near-term caution, the medium- to long-term equity outlook remains robust. Earnings recovery is expected to broaden meaningfully through FY26 and FY27, powered by stronger performances from banks, manufacturing-linked businesses, and domestic consumption.

Structural reforms, including GST rationalisation, the continued rollout of production-linked incentives, and the government's commitment to fiscal consolidation, are expected to support an investment-led growth cycle.

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