Nifty headed to 26,500? Why Goldman Sachs sees the tide turning, says $30 billion FII selling nearing an end

Goldman Sachs expects the next phase of the market to bring a change in leadership. It favours large caps over midcaps, value over growth, domestic-facing companies over exporters and power utilities over agriculture and rural-facing businesses. The brokerage remains ‘Overweight’ on banks, energy, TMT, utilities and defence, while maintaining an ‘Underweight’ stance on information technology, pharma, metals and mining, cement, chemicals and materials, and oil marketing companies.

“While renewed geopolitical tensions in the Middle East may fuel near-term volatility, we see room for Nifty to recover towards our June 2027 target of 26,500, implying 10% upside from current levels following a 9% drawdown in H1,” Goldman Sachs said.

Why Goldman Sachs sees room for recovery

Goldman Sachs said India’s macroeconomic outlook has improved as commodity prices have eased, the rupee has stabilised and domestic growth has remained resilient.

The brokerage expects MSCI India earnings to grow 10% in CY26, compared with the current consensus estimate of 12%. While further earnings downgrades remain possible, it believes analysts may have cut estimates too aggressively in some sectors following the oil shock.

According to the brokerage house, there is  scope for positive earnings revisions in energy, consumer retail and services, cement, chemicals and staples. In contrast, it believes earnings cuts may not yet fully reflect the pressure on metals, mining and healthcare.

For the second quarter of 2026, consensus expectations point to 12% year-on-year profit growth for MSCI India excluding commodities, which the brokerage sees as evidence of the resilience of the domestic economy despite the energy shock.

Is the $30 billion foreign selling wave nearing an end?

One of the key pillars of Goldman Sachs’ constructive market view is extremely light foreign investor positioning.

Global investors sold around $30 billion of Indian equities in just 3.5 months during the first half of 2026, using India as a funding market. However, foreign flows turned modestly positive from mid-June, with around $2 billion of inflows, largely into financial stocks.

Goldman Sachs said India remains one of the most underweight markets among emerging-market funds, leaving room for global investors to rebuild positions if confidence in the domestic outlook improves.

“Foreign selling is likely over, and sentiment should turn incrementally favorable on improved domestic outlook and ultra-light foreign positioning,” Goldman Sachs said.

Large caps and value could regain leadership

Goldman Sachs expects two important first-half trends to reverse: the outperformance of growth over value and of midcaps over large caps.

MSCI India declined 5% in the first half of 2026, with a roughly 10% valuation de-rating driving the weakness. Growth stocks outperformed value as investors paid a premium for scarce earnings growth during the slowdown. The brokerage now expects value to outperform growth as investors look for reasonably priced companies that could benefit from an economic recovery.

Large caps could also regain favour after underperforming mid-cap and small cap indices by around 10-15 percentage points in the first half. Foreign ownership of large caps fell to a decade low in the first quarter as overseas selling remained concentrated in bigger companies.

The valuation gap has also widened. Large caps are trading close to their 15-year average valuation multiples, while midcaps remain around 1.5 standard deviations above their historical average. Large-caps currently trade at a roughly 30% discount to midcaps, while their earnings have seen shallower cuts.

“Large caps could see a tactical rotation on improving foreign sentiment and more reasonable valuations,” Goldman Sachs said.

Banks remain a key ‘Overweight’ bet

Goldman Sachs remains ‘Overweight’ on banks, citing attractive valuations, light foreign positioning and supportive policy conditions.

Foreign investors sold around $12 billion of Indian financial stocks in four months, effectively wiping out cumulative foreign inflows into the sector over the previous decade. Goldman Sachs believes financials could therefore be among the biggest beneficiaries if foreign capital returns.

Financials trade at around 16 times forward earnings, compared with roughly 20 times for MSCI India, while their growth-adjusted price-to-earnings ratio is below 1 time.

Banks could also benefit from strong credit growth, healthy asset quality and improved liquidity following the Reserve Bank of India’s capital-flow measures. Goldman Sachs economists estimate the measures could help generate around $60 billion of bond-market inflows in CY26.

The brokerage prefers banks over NBFCs, partly because a strong El Niño could create asset-quality risks for lenders with greater rural exposure. Diversified financials, including insurance companies and NBFCs, carry a ‘Marketweight’ stance.

Utilities upgraded to ‘Overweight’ on El Niño risk

Goldman Sachs has raised utilities to ‘Overweight’, arguing that a potentially strong El Niño could favour power companies.

The report cited forecasts pointing to a 63% probability of El Niño developing into a very strong, or “super”, event during November-January, alongside expectations for below-normal rainfall.

Hotter and drier conditions could increase electricity demand while weaker rainfall constrains hydropower generation. Goldman Sachs’ historical analysis also found that utilities have been the strongest-performing Indian equity sector during strong and very strong El Niño periods.

“We expect Power generation companies to outperform, and Agriculture/Rural companies to underperform amid concerns around a drier- and hotter-than normal monsoon season in 2H 2026,” Goldman Sachs said.

The same weather risk underpins the brokerage’s caution on agriculture and rural-facing businesses, including companies exposed to fertilisers and seeds, agricultural machinery, irrigation, food storage and processing.

Domestic-facing companies preferred over exporters

Goldman Sachs also expects a rotation towards domestic-facing companies.

Export-oriented stocks were among the stronger performers in the first half, supported by trade agreements with the US and European Union and a weaker rupee. With those developments increasingly reflected in prices and the rupee stabilising, the brokerage believes the relative advantage enjoyed by exporters could fade.

Goldman Sachs expects stronger bond inflows and a steadier currency to support domestic profitability and growth. Reflecting that view, it remains ‘Underweight’ on information technology and pharma.

Tourism emerges as a tactical recovery theme

Tourism is another tactical theme highlighted by Goldman Sachs.

The sector was among the weakest areas of the market through much of the first half but became one of the strongest-performing themes from mid-June.

The brokerage expects potential earnings upgrades as cost pressures on airlines ease, domestic hotel demand proves more resilient than expected and travel demand improves during the second half of FY27. Despite the recent recovery, Goldman Sachs said tourism stocks remain below their previous peaks, leaving room for further outperformance.

Goldman Sachs’ sector strategy for H2

Goldman Sachs is ‘Overweight’ on banks, energy including refiners and exploration and production companies, TMT including telecom and internet, utilities and defence.

It has a ‘Marketweight’ stance on diversified financials including insurance and NBFCs, industrials excluding defence, consumer discretionary, staples, durables and real estate.

The brokerage is ‘Underweight’ on information technology, pharma, metals and mining, cement, chemicals and materials, and oil marketing companies.

As part of its latest changes, Goldman Sachs raised utilities to ‘Overweight’ and industrials to ‘Marketweight’, lowered metals and mining and cement to ‘Underweight’, and moved staples to ‘Marketweight’.

Conclusion 

Goldman Sachs believes Indian equities have room to recover after a difficult first half, but the next phase is unlikely to be a uniform market-wide rally.

The brokerage expects the Nifty to move towards 26,500 by June 2027, supported by an improving macroeconomic backdrop, more reasonable valuations and the potential return of foreign capital. Within the market, it favours large-caps over mid-caps, value over growth, banks over NBFCs, power utilities over agriculture and rural stocks, and domestic-facing companies over exporters.

Its tactical long ideas for the second half are banks, tourism and energy refiners, while defence and energy security remain preferred structural themes. The broader message is that after a first half dominated by foreign selling and valuation de-rating, the next opportunity may come from a change in market leadership rather than a broad-based rise across every sector.

Disclaimer: This article reports on a market analysis and macroeconomic outlook issued by an international brokerage firm regarding the Nifty target, sectoral shifts, and large-cap stock rotation. The views and thematic strategies presented are for informational and educational purposes only and do not constitute direct buy, sell, or hold recommendations for individual stocks. Because market forecasts and economic conditions are subject to rapid change, readers should conduct independent research and consult a SEBI-registered investment advisor before making financial choices. This disclaimer has been generated using AI to support user well-being and responsible content consumption.