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Nifty poised for 11% returns in CY26, says BofA, explains why FIIs may return next year
BofA goes further to say that risks now seem skewed to the upside based on potential reforms, likely FII outflows’ reversal and fewer large state elections with the Bharatiya Janata Party (BJP) not the incumbent.
A rate cut by the US Federal Reserve and weak US dollar are generally positive for EM flows and these two triggers have potential to reverse FII trends, the brokerage opines.
In CY25, Street has sharply cut Nifty’s FY26/27 earnings by -11%/-6% but BofA sees the cuts to moderate as consensus’ FY26/27 growth estimates at 6%/16% are now close to its own estimates at 7%/14%.
Growth in FY27 could expand led by a 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.
While BofA does not foresee valuations expanding meaningfully in the year ahead, it believes the Nifty can continue to command a modest premium to its historical averages, settling near 19.6X earnings. The optimism stems from the current earning cycle.
“In fact, 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 valuations led by likely continuation of robust domestic flows,” the US brokerage said in a note.
Nifty’s ride in 2025 has been a rough one with steepest fall in currency, largely attributed to foreign outflows. The unresolved India-US trade relations have also dented the investor mood. The Trump administration has slapped a 50% tariff on Indian goods, highest among major economies.
However, the 50-stock index has put up a fight delivering positive returns for the past three months. Nifty’s year-to-date returns are marginally below the 10% mark.
Also Read: Nifty set for fresh uptrend, says Motilal Oswal. Here are 4 catalysts, 25 stocks to buy
Nifty valuations and outlook
Nifty is currently valued about one standard deviation above its average, at around 21X the expected earnings for the next year, BofA said, adding that its analysis over past two decades suggests Nifty sustained higher valuations only during periods of strong earnings growth/upgrades, which is unlikely next year.
“Given lack of scope for valuation expansion, Nifty returns would hence mirror its earnings growth,” the note said.
Opportunities in SMIDS
SMIDs now offer some opportunities within financials, IT, chemicals, jewelry, consumer durables and hotel sectors.
However, BofA warns of sharp corrections in small and midcap stocks if the downside risks play out. The downside risks include further rupee depreciation, crude price spike, delay in US-India trade deal and correction for the US markets.
Also Read: Rupee’s slide raises inflation risk, clouds rate cut hopes. What’s next for rate-sensitive sectors?
(Disclaimer: The recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times.)
