Indian equity benchmark Nifty 50 is expected to offer 11.4% to upside 29,000 level in 2026, Bank of America Securities noted in a latest report and added that the large cap stocks will continue to outperform small/sid (SMID) caps, similar to trends seen in the current financial year.
“That said, SMID cap now offers some opportunities within financials, IT, chemicals, jewelry, consumer durables & hotel sectors,” it said. “Risks seem skewed to the upside based on potential reforms, likely FII outflows’ reversal and events calendar.”
If the downside risks play out, the brokerage firm expects it leading to a sharp SMID cap correction. On the events calendar, it sees four downside risks—a further rupee depreciation, crude price spike, delay in US-India trade deal & correction for the US markets.
The upsides it expects to support the market are potential RBI/FED rate cuts, fewer large state elections & conclusion of pay commission hike report. “Also, FII outflows could reverse as likely FED cuts & weak USD are generally positive for EM flows & Nifty’s likely outperformance vs S&P (expect 4% returns),” it said. “India could also accelerate reforms, a positive for markets.”
What does the report suggest?
According to the report, an analysis of over past two decades suggests Nifty sustains higher valuations only during periods of strong earnings growth/ upgrades, which is unlikely next year.
Basis current earnings cycle, Nifty deserves to trade at valuations slightly above its long-term averages at 19.6x but could sustain its current +1SD (standard deviation) valuations led by likely continuation of robust domestic flows.
Given lack of scope for valuation expansion, Nifty returns would hence mirror its earnings growth, according to BofA which expects the earnings cuts to moderate as consensus’ FY26/27 growth estimates at 6%/16% are now close to its estimates at 7%/14%. “Growth in FY27 could expand led by pick up in loan growth for financials, discretionary spends aided by GST cuts, telecom tariff hikes, stronger non-ferrous metals and very low base for IT & staples,” it said.
On liquidity and FII outflows
Further, it expects liquidity in the market likely to improve as FII outflows from secondary markets moderate and liquidity from strong DII flows continues. Thus, we expect primary activity to remain strong in CY26 as well. “Even if we conservatively assume primary market activity like peak levels in CY24, and no FII inflows, and modest increase in DII flows at +9% YoY (in line with nominal GDP growth), it sees flows of $46 billion (+52% higher) to secondary markets in CY26 which will help sustain valuations at +1SD.
