Despite a slew of measures from the government aimed at boosting demand and growth—including RBI’s rate cuts, tax reductions, and the much-talked-about GST move—markets have not responded with the kind of enthusiasm many expected. Gautam Duggad, Head of Research at Motilal Oswal Financial Services, explained the reasons behind this muted reaction in an interview with ET Now.

Foreign selling and valuations a drag
Duggad pointed out that relentless foreign institutional selling has weighed heavily on sentiment. “In the last 20 months, and in calendar year 24 plus the first eight months of calendar 25, foreigners have sold $15 billion, while domestics have bought $123 billion—$63 billion last year and roughly $60 billion in the first eight months,” he said.

High valuations are also adding to the discomfort. “The valuations of Nifty at about 21-22 times, while not exorbitantly expensive, and even midcap and smallcap indices at 25 and 27 times, are giving some discomfort,” Duggad explained. With corporate earnings barely growing in FY25, stretched valuations appear more difficult to justify.

Earnings growth hopes pinned on second half
Despite the challenges, Duggad remains hopeful of an earnings recovery this year. “Now this year, we have an expectation of about 8% to 10% earnings growth. We hope that sentiment will lift in the second half of the fiscal year, starting on 1st of October, and then the market may at least deliver the earnings growth that we are expecting this year,” he noted.

He highlighted that the government’s actions—from tax cuts to liquidity infusion—could start reflecting in the festive season, but until then, markets are likely to remain stock- and sector-specific.

Capex has played its part, focus now shifts to consumption
On what could drive the earnings revival, Duggad said capex had already delivered over the last five years with massive government spending. “We had a total capex budget of Rs 1.9 trillion back in 2019. We have almost reached somewhere close to 11 lakh crore. So, this is a five-and-a-half-times growth in the last five-six years, and the government has rightly shifted focus from this year’s budget from capex towards consumption,” he said.With banks, IT, and consumer staples—together comprising 50-55% of the index—struggling to deliver meaningful growth, smaller sectors such as capital goods, cement, retail, healthcare, and metals are expected to drive modest earnings growth this year.Consumer discretionary takes the lead
Duggad was clear about his stance on consumption: staples are out, discretionary is in. “Our entire weight in consumption has been residing in consumer discretionary, so much so that in July we removed the sole consumer staple stock that we were holding. Today, if you look at our model portfolio, the consumer staple has a zero weight,” he said.

He sees strong potential in quick commerce, food delivery, jewellery, apparel, footwear, and hotels. “Hotels are looking exceedingly well… the hotel upcycle could continue for a few more years in our view,” he added.

Sectors to watch: EMS, auto, and industrials
Beyond consumption, Duggad highlighted several overweight positions. “We have a big overweight on EMS companies, which is one of our favourite sectors… we continue to like Dixon, Amber, and even Kaynes for that matter,” he said. Industrials, telecom, and autos also remain in focus, with the auto sector emerging as a major beneficiary of GST rationalisation.

Calling the GST move “probably the best and the biggest reform that a government would hope to undertake in its third term,” Duggad said the market may have reacted cautiously in the short term, but the structural benefits are expected to unfold over time.