Investing.com -- Bank of America has turned constructive on the Nifty 50 index, forecasting a 14% potential return by December 2025, with a target of 25,000.
The shift in stance comes as Nifty trades at its long-term average valuation, while earnings growth estimates remain conservative compared to market consensus.
“Market reaction has been in line with our bearish view since August 2024,” BofA analysts wrote.
“We stay bearish on small and mid-cap (SMID) stocks but turn constructive on Nifty.”
The bank expects six sectors—telecom, financials, industrials, energy, IT, and autos—to contribute 85%-89% of Nifty’s earnings growth over the next two years.
Despite its positive outlook, BofA maintains a conservative earnings estimate for Nifty, projecting 12% growth for FY26 and 13% for FY27, compared to street expectations of 15% and 14%, respectively.
The firm anticipates downward revisions to consensus estimates but sees smaller earnings cuts for its preferred sectors.
BofA remains cautious on global risks that could impact Indian markets. “We continue to argue three downside risks for Nifty,” wrote Bofa. They highlighted the potential start of tariff wars, a slowdown in U.S. economic growth, and softening domestic inflows.
Given Nifty’s 97% correlation to the S&P 500, any U.S. economic weakness could trigger foreign institutional investor (FII) outflows and risk-off sentiment.
The firm also continues to avoid SMID caps, despite their recent 21%-26% correction, citing expensive valuations and a likely shrinking growth differential versus Nifty.
“SMID caps still trade at a 52%/13% premium versus Nifty,” BofA observed, adding that their valuations remain stretched.
BofA favors rate-sensitive domestic cyclicals, expecting interest rate cuts by the Reserve Bank of India (NSE:BOI) (RBI) to boost economic and credit growth. However, the firm remains defensive in the short term, preferring healthcare and telecom stocks while downgrading consumer staples due to expensive valuations and the lack of fresh growth triggers.