Largecaps to outperform in 2026 as SMID valuations look stretched: BofA Sec

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India’s equity markets are expected to deliver moderate gains in calendar year 2026 (CY26), with the Nifty seen at 29,000, an upside of 11.4 per cent. In its latest India Equity Strategy report, titled A flicker of hope, Bank of America (BofA) Securities said it continues to prefer largecaps over small and midcaps (SMIDs) in CY26 as valuations remain elevated and risks are skewed to the downside.

 

The foreign brokerage that, while the SMID universe now offers some opportunities within Financials, IT, Chemicals, Jewellery, Consumer Durables & Hotel sectors, the risk-reward balance is unfavourable at current levels. Additionally, it warned that downside risks, if they play out, could especially lead to a sharp correction in the SMID space. 

No scope of valuation expansion

Analysts noted that the Nifty is currently valued at about 21 times its expected earnings for the next year, which is one standard deviation above its long-term average (+1SD/21x one-year forward earnings). "Our analysis over the past two decades suggests Nifty sustains higher valuations only during periods of strong earnings growth/upgrade, which is unlikely next year," the brokerage said.

 

Based on current earnings cycle, the benchmark deserves to trade at valuations slightly above its long-term averages at 19.6x, but sustaining the current higher band will require continuation of strong domestic flows. Given the limited scope for valuation expansion, Nifty’s returns will largely track earnings growth. 

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SMIDs exposed to sharper volatility

According to analysts at BofA Securities, risks in 2026 appear skewed to the upside. The events calendar for the year is favourable, driven by factors such as potential RBI and US Fed rate cuts, fewer large state elections, and the completion of the pay commission hike report. The brokerage also noted that foreign investor outflows could reverse, supported by expected Fed cuts, a weaker dollar, typically positive for emerging markets, and Nifty’s likely outperformance versus the S&P 500. In addition, India may accelerate reforms, which would further support markets.

 

However, BofA highlighted four downside risks, including further rupee depreciation, a spike in crude oil prices, delays in a US–India trade deal, and a correction in US equity markets, though these are not part of its base case outlook.

Sector views reinforce preference for largecaps

Analysts at BofA Securities maintained a cautious stance on SMID caps. While the earnings premium of SMID caps over large caps has narrowed, their valuation premium has continued to expand. Because of this divergence, BofA remains wary of SoE (State-owned enterprises) names, low-float stocks and momentum-driven counters within the SMID universe.

 

However, despite their overall preference for large caps, BofA sees selective opportunities emerging within SMIDs. These include pockets in financials, healthcare, batteries, real estate, chemicals, durables, jewellers and hotels, where valuations and earnings visibility appear more favourable.

 

The brokerage also favours domestic rate-sensitive sectors, supported by expected rate cuts, as well as defensives like telecom, hospitals and pharma, and select discretionary and capex-linked plays such as defence, shipbuilding and power transmission and distribution.  (Disclaimer: View and outlook shared belong to the BofA Securities and are not endorsed by Business Standard. Readers discretion is advised.)