2025 is drawing to a close, but what’s the call for the markets in 2026? The Bank of America, Global Research is setting a bullish calendar year 2026 target for the Nifty, forecasting the benchmark to touch 29,000. This suggests around 11.4% upside from current levels. This bullish call is based on the expectation of accelerated earnings growth, with the brokerage emphatically stating there is “no scope of valuation expansion” to drive returns. The analysis for 2026, much like the trends observed in CY25, points towards large caps continuing their outperformance over small and midcaps.
Bank of America on India: FII outflows to reverse in 2026?
The key ingredient that could bring about upside momentum into the market is a surprising reversal of outflows by Foreign Institutional Investors (FIIs). The risk-reward scenario seems skewed to the upside primarily because of the potential expectation of FII inflows. FII flows usually bounce back strongly after a quiet or negative year. For example, big inflows in 2017, 2019–2020 and 2023 came right after weak years like 2016, 2018 and 2022.
This reversal is expected to be catalysed by global factors, particularly the likely US Federal Reserve interest rate cuts, which are generally favourable for emerging market flows. Furthermore, BofA anticipates a weak US dollar, which acts as a tailwind. Crucially, the Nifty is expected to significantly outperform the S&P 500, which the brokerage forecasts to deliver only 4% returns in its base case for 2026. Alongside these global triggers, the domestic market could benefit from accelerated policy reforms.
On the domestic side, the brokerage noted that DII flows, while likely to stay strong, are expected to temper somewhat. Yearly DII inflows are projected to moderate to $62 billion (approximately Rs 5.14 lakh crore) in CY25 from $71 billion (approximately Rs 5.89 lakh crore) in CY24. However, these flows are expected to grow by 9% in CY26, rising to $68 billion (approximately Rs 5.64 lakh crore), which is broadly in line with nominal GDP growth. The structural runway for DII growth remains immense, given that the allocation of household financial assets to mutual funds and equities remains low at 15%.
Bank of America on India: The key risks to watch
The report acknowledges four downside risks, though it does not view them as the base case: further Rupee depreciation, a crude price spike, a delay in the US-India trade deal, or a sharp correction in the US markets. The final analytical takeaway remains focused on domestic drivers: with risks skewed to the upside from reforms and FII reversal, the 29,000 Nifty target is a marker of projected earnings performance, cushioned by persistent domestic financial market maturity.
Bank of America on India: Large caps Vs small caps
The brokerage cautions that any material downside risks playing out in the economy could trigger a sharp correction, specifically in the SMID (Small and Mid-Cap) segment. However, the report also notes that pockets of opportunity are emerging within SMID caps, specifically in Financials, Information Technology (IT), Chemicals, Jewellery, Consumer Durables, and Hotels. For investors, the basic premise is simple: the index will only rise as much as its underlying earnings.
