AI Exit, India Entry: Indian Markets Surge in October
Indian equities surged in October as investors rotated away from AI stocks, according to a new report by Goldman Sachs Research.
Indian equities have staged a remarkable comeback, emerging as some of the strongest performers worldwide during October. According to a detailed report by Goldman Sachs Research, this surge was primarily fueled by a global shift in investor sentiment, as capital rotated away from AI-sensitive markets in North Asia and found a new home in India.
Reversing the Trend
For the first nine months of 2026, Indian markets had been lagging. However, October saw a dramatic reversal. India outperformed the broader Asia-Pacific region (excluding Japan), known as the MXAPJ, by a significant 7 percentage points. This recovery follows a volatile third quarter where the NIFTY had experienced a 10 per cent peak-to-trough decline, only to bounce back by 3 per cent from its lows in early October.
The Great AI Rotation
The report highlights a fascinating trend: a "market rotation" away from the hype of Artificial Intelligence. This wasn't just a global phenomenon but was mirrored within the Indian domestic market.
Domestic Shift: Enablers vs. Services
Investors shifted their focus from companies classified as "AI enablers" to traditional IT services. The contrast in performance was stark:
- AI Enablers: After a massive run between January and September 2026—where they outperformed the NIFTY by 76 percentage points—these stocks slumped in October, underperforming the benchmark by 6 percentage points.
- IT Services: This sector took the lead in October, outperforming the benchmark by 14 percentage points.
Sectoral Winners and Losers
The rally gained further momentum in the week ending October 30, with the NIFTY rising 2 per cent, beating the regional MXAPJ index's 1 per cent gain. The growth was led by specific segments:
- Pharmaceuticals: The standout performer, gaining 7 per cent.
- Mid-cap and Small-cap: These stocks led the broader advance with gains of 3-4 per cent.
- Financials: These remained the laggards, posting a modest 1 per cent increase.
The Money Trail: FIIs and DIIs
There has been a slight shift in institutional behavior. In the final week of October, Foreign Institutional Investors (FIIs) turned net buyers, injecting USD 1.2 billion into the market. Despite this, the yearly picture remains bleak for FIIs, who have been net sellers with total outflows of USD 31 billion this year.
On the other hand, Domestic Institutional Investors (DIIs) continued their strong support, buying USD 400 million during that same week, bringing their total year-to-date inflows to a staggering USD 75 billion.
Corporate Earnings and Valuations
Goldman Sachs found that corporate health remains a pillar of strength for the Indian market. Data from 89 MSCI India companies—representing 58 per cent of the index's market cap—showed that combined profits are tracking 15 per cent higher year-on-year and 13 per cent higher sequentially.
However, this growth is not uniform across all industries:
- Positive Surprises: Healthcare, utilities, and metals and mining.
- Misses: Consumer discretionary, materials, and cement companies.
Despite the growth, the report cautions that valuations remain high. India's forward price-to-earnings (P/E) valuation stands at 18.4 times, trading at a 92 per cent premium compared to the broader Asia-Pacific region—a level that is close to historical highs. All eyes now turn to early November as several large corporations prepare to announce their latest earnings results.