For equity investors, the coming period could prove crucial. As we move closer to 2026, a fresh debate has emerged among market experts and global brokerage houses regarding the valuation of Indian markets. While forecasts of Nifty reaching new highs are gaining traction, concerns around valuation gaps and hidden disparities within the market are also surfacing.
This raises an important question: Is Nifty truly undervalued for 2026, and what strategy should investors adopt at this stage?
What’s Happening?
The current market stands at a crossroads. Several Wall Street giants are bullish on India’s growth story. Global institutions such as Goldman Sachs and Bank of America (BofA) Securities have projected Nifty to reach 29,000 by the end of 2026, citing easing inflation and shifts in monetary policy that could position India as a safe investment destination.
However, these attractive headline numbers may not reflect the complete picture.
According to The Economic Times, while headline valuations appear compelling, significant valuation gaps remain beneath the surface. This suggests a sharp disparity between large-cap and mid-cap stocks. While a few select stocks seem reasonably valued, several segments of the market continue to remain overvalued, posing a challenge to Wall Street’s rebound calls and bullish forecasts.
Earnings Cycle and the Pace of GDP Growth
The future direction of the market will largely depend on corporate earnings and the country’s economic growth. According to PL Capital, the Indian equity markets are well-positioned to deliver strong performance over the medium term, i.e., the next 6 to 24 months. The key driver behind this optimism is the broadening of the earnings cycle. Growth is no longer limited to a few select sectors; instead, consumption, investment, and export-oriented sectors are all witnessing simultaneous improvement.
Data from Axis Securities suggests that corporate earnings are expected to grow at a 12%–15% year-on-year rate during FY2026–27. Alongside this, the Reserve Bank of India (RBI) has revised its FY2025–26 GDP growth forecast upward to 7.3%, higher than earlier estimates. Strong domestic demand and policy reforms are providing a solid foundation for economic growth, which in turn is supporting the markets. Going forward, this phase of the market will be driven not merely by valuations but by actual earnings delivery and tangible profit growth.
Target of 28,100
Axis Securities believes the Indian market is entering a strong earnings-driven upside cycle in 2026. The brokerage has set a base-case Nifty target of 28,100 by December 2026, supported by expected 12–15% corporate earnings growth in FY26–27, improving GDP trends, and robust domestic demand. The upward revision of GDP growth estimates to 6.7–6.8% for H1 FY27, along with the RBI’s 7.3% projection for FY25–26, indicates sustained economic strength over the medium term.
The rotation of global funds away from AI-led trades toward valuation-sensitive markets is seen as positive for India, particularly for large caps and high-quality mid-caps. While rupee weakness in 2025 remains a concern, expectations of currency stability ahead could provide market support, though import-heavy sectors may face pressure.
Resolution of the US–India tariff issue, strong DII fund flows, and increasing financialisation of domestic savings could help maintain market momentum. However, risks such as further rupee depreciation, inflationary pressures, global uncertainties, and delays in earnings recovery remain key challenges for 2026.
What Does This Mean for Investors?
For investors, this is a time to act with caution and clarity. According to Tribune India, PL Capital believes that flexi-cap fund investors should maintain a higher allocation towards large-cap stocks. A strategy with a strong, large-cap core portfolio, complemented by selective and strategic exposure to mid-caps, may be more effective.
At the same time, while the earnings recovery cycle is broadening, certain risks remain. As reported by The Hindu, uncertainty surrounding trade agreements and tariffs between the US and India could pose a major challenge. Institutions such as Nomura fear that expected cuts in US tariffs may not materialise, potentially denting market sentiment. Additionally, continued weakness in the rupee could delay the return of foreign institutional investors (FIIs). Therefore, investors are advised to adopt a buy-on-dips approach, without compromising on quality.
What’s Next?
Overall, as India moves toward 2026, market sentiment reflects cautious optimism. According to The Hindu, a Bank of America (BofA) survey indicates that fund managers have improved their outlook on India and now classify it as mildly overweight. Kotak Institutional Equities also believes that the phase of earnings decline ended within the calendar year 2025, and the market is now entering a recovery phase.
At the same time, HSBC’s analysis suggests that India has underperformed relative to global factors, creating potential undervaluation opportunities. Going forward, market direction will largely depend on the pace of corporate earnings growth and how global geopolitical challenges, especially trade relations with the United States, are resolved. The year 2026 is expected to be driven less by valuations and more by performance and profit delivery
*The article is for information purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
