BofA Securities sees Nifty at 29,000 in 2026; small & midcaps may correct sharply

BofA Securities is expecting Nifty50 to hit 29,000 mark in next calendar year, offering 11.5% upside for the investors. The overseas brokerage firm also believes that largecap stocks will outperform smallcap and midcap (SMID) counters, similar to trends seen in calendar year 2025. BofA Securities emphasises that further valuation expansion for Indian equities is limited, with upside to be led by earnings growth.

That said, SMID cap now offers some opportunities within financials, IT, chemicals, jewelry, consumer durables and hotel sectors, said BofA Securities. However, risks seem skewed to the upside based on potential reforms, likely FII outflows’ reversal and events calendar. Downside risks, if plays out, could especially lead to sharp SMID cap correction, it said.

The firm notes: "Nifty trades at +1SD/21x one-year forward earnings. Our analysis over past two decades suggests Nifty sustains higher valuations only during periods of strong earnings growth/upgrades, which is unlikely next year. 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. Given lack of scope for valuation expansion, Nifty returns would hence mirror its earnings growth."

In 2025, consensus estimates for Nifty's FY26/27 earnings have been reduced by -11% and -6%, in line with BofA's expectations. The firm expects these cuts to moderate as consensus growth estimates for FY26/27 at 6%/16% are now close to BofA's own 7%/14%. Growth in FY27 could expand, led by loan growth for Financials, discretionary spending aided by GST cuts, telecom tariff hikes, stronger non-ferrous metals, and a low base for IT & Staples.

Sector-specific factors, such as stronger loan growth and discretionary spending, could further support the FY27 outlook. Growth and earnings upgrades remain central to market direction.

On risks, BofA sees the balance tilted to the upside for 2026. The firm points to the potential for RBI/FED rate cuts, fewer large state elections, and the conclusion of the pay commission hike report. FII outflows could reverse, as likely FED cuts and a weaker USD are generally positive for EM flows, and Nifty may outperform the S&P. India could also accelerate reforms, supporting markets. Downside risks, though not the base case, include further rupee depreciation, a crude price spike, delay in the US-India trade deal, and a correction in US markets.

Regarding sector preferences, BofA favours rate-sensitive cyclicals such as Financials, Real Estate, Passenger/Commercial Vehicles, and regulated Power utilities. The firm expects well-off consumption to outperform mass consumption and anticipates a slowdown in capex growth for both central and state governments due to limited fiscal room. It prefers select capex plays with growth visibility, while being underweight Industrials and Cement. For global plays, BofA prefers Pharma and Aluminium, but is underweight IT, Steel, and Energy. Defensives like Telecom and Hospitals are also favoured