Sri Lankan corporate earnings growth is expected to moderate in 2026 as macroeconomic pressures re-emerge, despite a strong stock market rally in 2025. Analysts warn that softer demand and rising costs could weigh on profitability.
Sri Lankan corporate earnings growth outlook weakens as macro pressures rise
Sri Lankan corporate earnings growth is projected to slow in 2026, reflecting a shift from the robust recovery momentum seen last year to a more restrained economic environment. Market analysts say that while policy stability and improved confidence powered equities in 2025, emerging headwinds are likely to temper profit expansion in the year ahead.
The Colombo stock market delivered gains of more than 40 percent in 2025, supported by predictable fiscal policy, easing inflation, and improved liquidity conditions. However, First Capital Research cautioned that these supportive factors are gradually giving way to macroeconomic pressures that could restrain earnings momentum across several sectors.
According to the brokerage’s latest outlook, Sri Lanka’s economic growth is expected to decelerate to between 3 and 4 percent in 2026, compared with an estimated 5 percent expansion in 2025. This slowdown is expected to translate into softer revenue growth and tighter margins for listed companies, particularly those exposed to domestic demand cycles.
A key driver behind the moderation is lower government expenditure. Fiscal consolidation efforts are expected to limit public sector spending, reducing the flow-through impact to businesses that rely on state-led projects and consumption. At the same time, consumer spending is forecast to soften as households remain cautious amid lingering cost-of-living pressures.
While overall business conditions have stabilised following the post-crisis adjustment phase, confidence indicators suggest that momentum is weakening in both services and manufacturing. Analysts note that slower activity in these segments could weigh on industrial performance in 2026, even as construction activity shows relative resilience due to ongoing infrastructure initiatives.
Rising input costs also pose a challenge to earnings sustainability. Currency depreciation has increased import expenses for raw materials, intermediate goods, and energy inputs, directly affecting operating margins. In addition, the possibility of upward adjustments to electricity tariffs represents a further risk for energy-intensive industries, particularly manufacturing and export-oriented firms.
First Capital Research estimates that corporate earnings growth, which surged by an estimated 25 percent in 2025, is likely to normalise to around 17 percent in 2026. While this still represents a healthy expansion by historical standards, it marks a clear deceleration from the rebound phase that followed economic stabilisation.
Despite the softer aggregate outlook, analysts emphasise that opportunities remain at the sector level. Construction companies are expected to benefit from continued public and private infrastructure activity, supported by policy initiatives aimed at stimulating long-term growth. Tourism-related businesses are also viewed favourably, as arrivals continue to recover and foreign currency inflows provide a natural hedge against exchange rate volatility.
Diversified export-oriented firms are another area of relative strength. These companies are better positioned to capitalise on currency movements while maintaining revenue streams from overseas markets. In contrast, businesses heavily dependent on domestic consumption may face greater pressure as spending growth slows.
Market observers note that the coming year is likely to reward selectivity rather than broad-based exposure. Investors may increasingly focus on balance-sheet strength, pricing power, and operational efficiency as key differentiators in a lower-growth environment. Companies with the ability to manage costs and pass on price increases selectively are expected to outperform peers.
Overall, the outlook for Sri Lankan corporate earnings growth in 2026 reflects a transition from recovery-led expansion to a more mature phase of the economic cycle. While the pace of growth is set to slow, analysts stress that disciplined policy execution and targeted sectoral support could help sustain profitability and investor confidence over the medium term.