Bank of America (BofA) Securities has turned constructive on Indian equities after maintaining a cautious stance for nearly two years, with the Nifty potentially climbing to 26,200 by December 2026, implying an upside of around 12 percent from current levels. According to The Economic Times, BofA had remained cautious on Indian stocks since August 2024 and had identified eight key risks that could keep the market volatile. However, five of those risks have either already materialised or are now reflected in valuations, prompting the brokerage to adopt a more positive stance. The remaining risks could create around 7 percent downside for the Nifty 50 in BofA's bear-case scenario, though the brokerage sees the index reaching 26,200 in its base case. The latest data shows high-frequency macro indicators point to a robust economy, while recent upgrades to macro forecasts and a 230-basis-point year-to-date cut in consensus FY27 earnings estimates suggest that earnings downgrades may have peaked.
The global AI boom remains intact despite recent volatility in Asian technology stocks, with UBS maintaining a constructive outlook on the global macro environment led by artificial intelligence trade. Divya Nagarajan, Head of India Research and APAC Regional Product Manager at UBS, notes that memory prices are expected to peak only in FY28 as bottom-up demand continues to be very robust. As reported by Moneycontrol, the current view is that there is no major risk to this forecast except for some concerns on the private credit side, though these risks do not appear large enough to trigger an inflection point. Nagarajan emphasized that what happened was a technical correction, and several people say this is how markets top out, but the underlying demand conditions remain intact.
Industrial stocks may still have room to rise as short-cycle demand starts recovering after nearly two years of weakness, according to UBS India. Amit Mahawar, Industrial Analyst at UBS India, believes the recent 40-50% jump in new orders is not a one-off phenomenon and that the recovery is still in its early stages. As reported by CNBC TV18, Mahawar noted that after a gap of two years, the short-cycle segment is starting to see momentum, particularly in pricing terms as copper, silver, steel, and other materials have inflated significantly. The recovery is being supported by several emerging areas including data centers, electronic manufacturing services (EMS), semiconductors, defence, and import substitution.
According to BofA, the two key near-term risks facing the market are potential US Federal Reserve rate hikes and heavy primary-market issuances. The brokerage expects both risks to peak by October 2026, creating room for a Nifty rally from November. One key risk identified earlier was a sharp rise in crude oil prices above $100 a barrel, compared with BofA's fourth-quarter 2026 estimate of $81 a barrel. The brokerage noted that crude prices have reversed from the $100-a-barrel level seven times over the past seven months since the start of the West Asia conflict. Weak monsoon conditions are also among the risks, with the current rainfall deficit at 13 percent, close to the 15 percent worst-case scenario previously projected by BofA. The rupee was another concern, though recent inflows of around $136 billion should provide support to the currency, with an appreciation bias expected.
According to BofA, the brokerage has shifted its preference from small- and mid-cap stocks to large caps after broader market indices outperformed the Nifty by 13-20% year-to-date. The valuation premium for small- and mid-cap stocks currently stands at 43%, down from a peak of 53%. Within the Nifty universe, BofA is positive on private banks, NBFCs, automobiles, upstream energy, cement, regulated power utilities, jewellery, quick commerce and EPC contractors. It remains cautious on PSU banks, insurance, steel, downstream energy, consumer staples, telecom, healthcare, industrials and information technology. The brokerage expects primary market issuances worth $30 billion between September and December, with activity peaking in October, and forecasts Nifty earnings growth of 10% in FY27 and 15% in FY28, compared with Street estimates of 12% and 15% respectively.
On monetary policy, BofA's economist expects the Reserve Bank of India to raise the policy rate by 25 basis points by December 2026, compared with around 45 basis points currently priced by swap markets. The brokerage also expects the Federal Reserve to raise rates by 75 basis points during the period, compared with around 35 basis points currently priced by markets. BofA also flagged the potential impact of artificial intelligence-led disruption on employment in India as a longer-term structural risk. The brokerage expects primary market issuances worth $30 billion between September and December, following $36 billion raised year-to-date, with issuances likely to peak in October.
