BofA turns bullish on Nifty after 2 years, cautious on small, midcaps. Here’s what it expects now
In its latest note, BofA Securities highlighted that its earlier cautious stance that markets may stay volatile was driven by eight risks, out of which five have already played out or been priced in. The remaining three risks could pose a 7% downside risk for Nifty in its bear case but in its base case scenario, it sees potential for Nifty at 26,200 by December 2026.
5 out of 8 risks have played out for Nifty
The first five risks that BofA Securities believes have already played out include soaring crude prices, rupee depreciation, weak monsoon, commodities and RBI rate hikes. The Wall Street bank unit sees a pattern of crude reversing from $100 per barrel, seven times in the past seven months or since the start of the West Asia conflict. Additionally, if feels the recent inflows of $136 billion should help the rupee, with the bias set for appreciation.
BofA expects no further acceleration in aluminum and copper prices, and its economist expects the RBI to hike its policy repo rate by 25 bps by Dec 2026, lower than the 45 bps hikes already priced in by the swap markets. Regarding weak monsoon expectations, current deficits at 13% are already close to worst case weather forecast of 15% deficits.
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Nifty still faces 3 risks
While these five risks have already been priced in or played out, big primary offerings, Fed rate hike expectations and AI disruption were listed as the other three risks that may still have the ability to spook investors. BofA Securities expects lumpy issuances totaling $30 billion over the rest of the year, as against $36 billion raised in 2026 so far, to likely hit its peak in October.
BofA expects the US Federal Reserve to announce a 75 bps rate hike over September-December, higher than the 35 bps hike market is pricing in. Additionally, AI disruption and its impact on India’s employment continues to be a structural risk, according to the analysts.
BofA turns cautious on smallcaps, midcaps
With mid and small cap indices outperforming Nifty by 13-20% this year so far, their valuation premium is now at 43% vs 53% at peak, BofA Securities said. Although it continues to see select opportunities within the broader markets, the Wall Street giant reverses its preference for small and mid caps, and suggests switching to large caps, in line with its view that investors would have to stay nimble to generate outperformance.
“Across market caps, the stocks that we prefer are either those that offer value or high earnings growth or visibility,” it concluded.
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