The S&P 500 showed a 16 per cent CAGR outperformance over India’s Nifty 500 in the three-year period ended October 30, 2026. While many investors worry about Indian equities, data showed that innovation drives market success in both nations. Companies that failed to innovate got punished by investors in America.
Foreign investors have never been this bearish on India, or so the latest market chatter goes. Just two years ago, they could hardly get enough of Indian equities. How quickly sentiment changes! Meanwhile, a section of Dalal Street apparently believes every market disappointment deserves a government remedy. But amid all the wailing, investors may be missing the forest for the trees, yet again. What if India’s bigger problem is not insufficient encouragement to buy its stocks, but a lack of innovation among the companies issuing them?
And this may not be India’s problem alone. Even in America, the stock market is increasingly distinguishing between businesses driving innovation and those struggling to keep pace.
At the headline level, the S&P 500 has been a golden goose for investors, with its 27 per cent CAGR returns (includes benefits from INR depreciation vs USD) and 16 per cent CAGR outperformance over India’s Nifty 500 in three-year period (ended October 30, 2026), when looking on an equal weight basis, its edge over India’s Nifty 500 gives a more nuanced picture. An analysis based on equal weights weeds out the impact of few stocks with outsized returns and gives a colour on broader health of the market. On a five-year basis, there is hardly anything to choose between the two equal-weight indices with S&P 500 returns (in rupee terms) at a CAGR of 12 per cent versus Nifty 500’s CAGR of 11 per cent. On a 10-year basis too, the difference is not alarming at 14 and 12 per cent, respectively.
A closer look at the S&P 500 also reveals its share of pain points. 58 per cent of S&P 500 stocks are trading at levels 20 per cent or more below its all-time highs. Yes, that’s not as bad as the Nifty 500’s 78 per cent, but data makes it clear even in the most innovative economy investors are punishing non-AI stocks or even a few AI stocks in recent days.
US lesson
In America, established businesses have paid a price for losing their innovative edge. Nike, Netflix, Lululemon, Intel, Kraft Heinz, Dow Inc, and Ford Motor, grappling with past valuation excesses, or stale product offerings or competition from nimbler rivals, individually trade more than 50 per cent below their respective all-time highs. Put simply, innovation is no longer optional, even for celebrated brands.
Tech companies have not been spared either. Adobe, for instance, is down 64 per cent from its all-time high and 31 per cent from its 52-week high, as concerns over AI disruption weigh on its prospects. Companies unable to adapt risk losing relevance.
Excessive valuations, discussed in our page 1 article ‘When stock valuations go wrong, blame taxes?’ (October 18), explain part of the recent stock market pain. Yet they leave behind a more uncomfortable reality. Amid the global race for technological breakthroughs, the silence from India’s corporate giants is almost deafening.
Technological leadership demands more than just intent or ambition.
This is reflected in a more direct way in mutual funds marketed around innovation theme in India. Depending on the fund, top holdings included ICICI Bank, Eternal (Zomato), Axis Bank, HDFC Bank, Adani Ports, Reliance Industries, Info Edge, Trent and Varun Beverages among their largest investments. Compare these with Innovation ETFs in the US, whose holdings include Micron, Tesla, Tempus AI and Marvell Technology, businesses associated with autonomous technology, AI-driven healthcare and gene editing.
One can argue these funds have different mandates, and improvements in distribution, banking or consumer businesses certainly qualify as innovation. Yet the contrast highlights the relatively limited choice of frontier-technology companies available to domestic equity investors.
No breakthroughs
Money, meanwhile, has hardly been India’s principal constraint. For calendar 2025 (a year not impacted by war-related raw material spikes) the Nifty 500’s pre-tax profit margin of 12.8 per cent compared with 12.2 per cent for the S&P 500 excluding America’s Magnificent Seven stocks. Indian companies also enjoyed considerably higher margins than their counterparts in Germany (7.7 per cent), Japan (9.9 per cent) and the UK (11.2 per cent). Clearly, corporate India has hardly been starved of profitability cushion to back innovation.
Yet research spending tells another story. Top listed Indian IT services companies spent about ₹1,000 crore to ₹3,000 crore in R&D, or 1-2 per cent of total expenses, in FY26. Clearly, profitable businesses and a technology services workforce do not automatically produce globally dominant intellectual property without higher investments.
The government has hardly been inactive. Corporate tax cuts in 2019, manufacturing incentives and infrastructure investment sought to encourage businesses to invest. The results in breakthrough commercial innovation remain less impressive.
That is not to suggest India has never produced genuine innovators. The country has made significant strides in pharmaceuticals, automobiles, emerging technologies and digital payments, particularly UPI. Bengaluru-based Sarvam AI raised $234 million in June. Yet such companies are still largely missing from the listed universe and, consequently, have little bearing on overall stock market performance.
India cannot summon global capital merely by making its stock market friendlier. Taiwan’s semiconductors, South Korea’s memory chips and America’s AI ecosystem offer exposure to technologies the world increasingly needs. Indian companies must build more such globally indispensable businesses. Fund managers lobbying for LTCG tax cuts should also push for more innovation from their portfolio stocks. Otherwise, investors may continue debating the cost of owning Indian stocks while overlooking the more consequential question: what do these companies actually own?