Bernstein has cut its year-end Nifty target to 25,000 from 26,000, as uncertainty over the US trade conflict and a lack of earnings upgrades weigh on its outlook for Indian equities. The brokerage expects some recovery in the market but sees limited scope for sustained gains amid deteriorating macroeconomic conditions, elevated crude oil prices and continued pressure on corporate earnings.
The revised target follows an earlier reduction from 28,100, which Bernstein had set at the start of the year. The brokerage had initially expected a 7% upside from its year-end target, but subsequently turned more cautious as the trade conflict intensified and earnings expectations weakened.
In its India strategy report, Bernstein said its expectations of positive returns were based on mean reversion, or a recovery after the market's decline, rather than a broad improvement in the outlook for Indian equities.
Valuations Fall
The Nifty's forward 12-month price-to-earnings ratio has fallen to 16.6, its lowest level in six years, according to Bernstein. The index's valuation had dropped below 17 times for the first time since June 2022, putting it near levels last seen during the Covid-19 market correction and the decline in 2022.
However, the brokerage cautioned against treating the decline in valuations as a signal that Indian equities have become inexpensive.
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“Nifty valuations at six-year lows might sound a tempting proposition despite modest earnings growth over the last two years,” Bernstein said in its report, adding that the comparison with the index's own history could be misleading.
The brokerage said Indian equities remain expensive relative to several Asian markets, even after the recent correction. It also cited broader market weakness and what it described as unprecedented domestic fund flows as reasons valuations remain elevated.
Earnings Pressure
Bernstein said earnings revisions have not turned positive for FY27, with only marginal growth in estimates over the past three months and several sectors continuing to see cuts.
The brokerage said expectations of earnings upgrades had been supported by the prospect of a recovery in demand, but that a shift towards lower estimates had weakened the case for a sustained market rebound.
It also flagged cost pressures for companies that rely on imports, including those in industrial sectors facing tight supply conditions. Depreciation of the rupee could help some export-oriented businesses, including information technology, healthcare and automobiles, but could raise costs for other companies.
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Macro Risks
Bernstein said India's economic backdrop has deteriorated, with weaker monsoon conditions and reservoir levels adding to concerns. It also pointed to geopolitical risks, uncertainty over a US trade deal and continued risks around Russian oil sourcing.
The brokerage said the strong macroeconomic growth recorded in the previous quarter was unlikely to be repeated, adding to the challenges facing its outlook for Indian equities.
Bernstein also said a reduction in long-term capital gains tax would be desirable for a capital-starved economy but would not, on its own, be enough to drive sustained foreign fund inflows without a recovery in earnings growth and the broader investment cycle.
The report said a sharp one- to two-day market rally following a tax cut could be offset by foreign investors selling into the gains. It also noted that artificial intelligence adoption in India was limited in the near term, with risks to white-collar employment and services exports becoming more significant over time.
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