India's earnings recovery has begun to broaden across sectors, but the market may not yet be fully pricing in the upcycle, according to Hemant Kanawala, senior executive vice president and head of equity at Kotak Life Insurance.After two weak years, relative valuations have moved closer to multi-year lows while large-caps are trading at about 19.7 times estimated FY27 earnings, Kanawala said. With Nifty profits expected to grow 17% to 18% in FY27 and Q1 earnings rising 18%, well above expectations, the setup offers a more favourable risk-reward equation, provided private capex revives and external risks remain contained.After a weak market cycle in the last 2 years, how are you assessing the current risk-reward equation in Indian equities, and what could be the key triggers for the market over the next 12 to 18 months?After two weak years, much of the bad news appears priced in. Relative valuations and performance versus emerging peers are near multi-year lows, so downside looks contained while the earnings recovery isn't yet reflected. Large-caps trade at reasonable multiples (~19.7x FY2027E), with earnings set to compound in the mid-teens.Key triggers are a durable end to the West Asia conflict and softer crude, earnings acceleration (Nifty profits +17% to 18% in FY2027), private capex revival, and a stable external position.The risks are a prolonged effect of conflict, weak monsoon, and rate tightening. Encouragingly, the Q1 profits grew 17.7% versus ~10% as expected.Are current valuations adequately reflecting the earnings growth outlook, or do you see pockets where investor expectations have run ahead of fundamentals?The market shows sharp contrasts. On aggregate it's reasonable, with the Nifty near ~19.7x FY2027E, broadly its long-term average, but this masks wide dispersion. Low-P/E sectors like banks, metals and energy anchor the index, while parts of consumption and investment trade richly, with a significant part of index weight trading over 10% above historical averages. Mid-caps and small-caps carry premiums, but this partly reflects their exposure to higher-growth themes, so selective opportunities remain attractive. Conversely, banks and IT services have de-rated meaningfully, offering value. So, earnings are priced unevenly. The froth is concentrated, not broad-based.What do you think of the current Q1 earnings cycle and which sectors surprised positively?Q1FY27 was a picture-perfect, broad-based quarter with an earnings upgrade, one of the strongest in recent years. Nifty 50 PAT grew 18% year-on-year (versus ~10% expected), a 10-quarter high, while the broader universe (ex-OMCs) delivered 22% growth. Encouragingly, many sectors beat expectations and the upgrade-to-downgrade ratio turned favourable at 1.5x. Small-caps led with 31% growth, mid-caps posted an 11-quarter-high 23%, and large-caps grew 21%. Positive surprises came from metals, Financials (BFSI), select autos and power utilities while OMCs were the key drag amid high crude.How are you positioning the portfolio amid the ongoing debate around large-caps versus mid-caps and small-caps? Have you begun seeing a meaningful shift in market leadership?We keep a balanced allocation. Large-caps offer valuation comfort, particularly banks and IT, which have de-rated. Mid-caps and small-caps trade at premiums, but that reflects their exposure to higher-growth sectors, so they remain a valuable source of alpha. Over the past three months, broader markets outperformed, with mid-cap and small-cap indices gaining mid-to-high single digits versus low single-digit returns for the Nifty, so leadership has genuinely broadened. We favour financials, hold quality compounders across the cap curve, and prefer mid and small cap selectively for an alpha kicker. A durable leadership shift ultimately needs earnings to sustain it.Which sectors currently offer the most attractive combination of earnings visibility, valuation comfort, and balance sheet strength? Conversely, which sectors appear vulnerable to an earnings downgrade?Financials screen best. Banks and insurers offer reasonable valuations, troughing margins, strong credit growth, benign credit costs, and solid balance sheets. Telecom offers earnings visibility from tariff-led ARPU gains, and discretionary consumption also provides good earnings visibility, supported by lower taxes, rate cuts and improving incomes. Metals benefit from safeguard duties and higher realisations, though it's cyclical. On the vulnerable side, we see downgrade risks in staples (margin pressure), IT services (weak discretionary demand plus AI overhang) and residential real estate (affordability strain). Energy earnings remain volatile given crude and marketing-margin swings.As a long-term equity investor managing insurance capital, how do you balance valuation discipline with the need to remain invested through market volatility? What would make you materially increase cash or reduce equity exposure?As long-term investors of insurance capital with long-dated liabilities, we stay invested through volatility rather than time the market. India's structural drivers reward patience. Importantly, we don't take cash calls in our equity funds. Discipline is expressed through allocation, favouring reasonably valued compounders and trimming froth while retaining exposure to high-growth pockets. Resilient domestic flows provide the structural support.What would make us turn materially cautious on equities: a prolonged conflict pushing crude above US$ 105 with rate tightening, a sharp deterioration in the growth-inflation mix, or fiscal slippage. Absent those, we treat corrections as opportunities to add equity from a medium-term perspective.Foreign investors have started returning after an extended phase of selling. Is this the beginning of a durable reallocation towards India or a tactical trade driven by global liquidity and currency movements?It's early to call it durable. For now it looks more tactical, though the setup for a larger reallocation is building up. Foreigners sold heavily over two years (~US$ 25bn out CYTD26), leaving positioning unusually light, with most emerging-market funds underweight India versus benchmark. Recent flows turned positive (~US$ 2bn equity in July, plus ~US$ 9bn debt), aided by currency stability and a strong Q1. Relative valuations and light positioning near multi-year lows are supportive. But a sustained reallocation likely needs global risk appetite to broaden beyond current tech-heavy markets, so India's steady growth reasserts its appeal.(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)