Nifty could outrun S&P in 2026, mirror earnings growth: Amish Shah, BofA

Our analysis over past two decades suggests Nifty sustains higher valuations only during periods of strong earnings growth/upgrades, which is unlikely next year, Shah said.

As the markets prepare to enter 2026, Amish Shah, head of India research at BofA Global Research, tells Puneet Wadhwa in an email interview that continued strong economic growth in the US on the back of AI-related capex and strong consumer demand as well as Fed easing is mostly priced in at the current levels. Underperformance of small-and midcaps, he said, is likely to continue in the year ahead. Edited excerpts: 

What does the global financial market set up look like as we head into 2026?

 

Artificial intelligence (AI) story could still have some legs. They argue that bull-markets end when liquidity squeeze meets high leverage, both of which look unlikely given our global research team arguing for three Fed cuts next year, a weaker dollar and high demand for AI assets. 

 

World market outlook (ex-US) seems mixed. Our global teams believes that the S&P may deliver just 5 per cent upside for calendar year 2026 (CY26). However, Latin America can keep rising on policy easing and nearshoring. Japan may benefit from higher return on equity (ROE) as corporate reforms unlock cash. 

Chinese equities are getting expensive and saw Q3 earnings downgrades. European equities face weaker earnings expectations, higher risk premiums, and the risk of a GDP contraction. Macro rebalancing and weaker dollar could mean ex-US opportunity.

 

Geopolitics, economics (central bank policies) or market valuations: which among these will drive markets in 2026 globally?

 

For CY26, economic policies would be in focus. Outcome of US-China trade relations will also be a key factor to watch. Continued strong economic growth in the US on the back of AI-related capex and strong consumer demand as well as Fed easing is mostly priced in. Valuations for AI-linked stocks would be an ongoing debate. We believe the Nifty could outperform S&P in CY26.

 

Have the Indian markets peaked out at least for the next 6 - 8 months?

 

In the near-term, markets could see correction on concerns around rupee depreciation as well as delays in India-US trade deal. For CY26, we expect Nifty to deliver around 12 per cent return from the current levels. Nifty trades at 21x one-year forward earnings or at one standard deviation (+1SD) valuations. Our analysis over past two decades suggests Nifty sustains 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.

 

Will the primary markets continue to grab investor attention in 2026?

 

Primary markets could continue to stay robust given a combination of continued flows into domestic mutual funds providing liquidity for equity issuances and attractive valuations. However, despite robust primary market activity, CY26 could see sufficient flows to support secondary markets, if there is a reversal of trend on $17 billion of foreign institutional investor (FII) outflows registered in YTD CY25. FII outflows could reverse as typically weaker US dollar and Fed cuts are generally positive for Emerging Market (EM) flows.

 

What's your market strategy for 2026? 

 

We prefer rate-sensitive domestic cyclicals such as Financials, Real Estate, Passenger/Commercial vehicle & regulated Power utilities. Well-off consumption basket can outperform the mass-consumption basket. Within global plays, Pharma & Aluminum are preferred; remain underweight on information technology (IT), Steel & Energy. That apart, we prefer defensives: Telecom & Hospitals. Capex growth is likely to meaningfully slow led by the government capex, given limited fiscal room. Hence, we stay Underweight on Industrials & Cement.

 

And the mid-and smallcap (SMID) segments?

 

We have been bearish on the SMID segment and expect their underperformance seen in CY25 to continue in 2026. That said, post the correction, we now see some opportunities within SMID in sectors linked to Financials, IT, Chemicals, Jewelry, Consumer Durables and Hotels.