Bernstein cut its December 2026 target for the Nifty 50 to 25,000 from 26,000 earlier, citing a deteriorating macroeconomic backdrop, persistent crude oil and supply-chain pressures, and a lack of meaningful earnings upgrades.
A reduction in long-term capital gains (LTCG) tax, it said, would be insufficient on its own to trigger sustained foreign institutional investor (FII) inflows.
Meanwhile, Bernstein’s revised Nifty target implies an upside of around 8.1 per cent from the current level. However, the brokerage cautioned that a further 4-5 per cent rally would take Indian equities out of their current valuation comfort zone, bringing them closer to recent averages at around 18.2 times forward earnings.
In a note dated October 19, analysts led by Venugopal Garre, managing director at Bernstein, said the revised target factors in an 18x valuation multiple on 2027-28 (FY28) earnings, which are assumed to grow 9 per cent over FY27.
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"Near March-end, we baked in expectations of the conflict resolving within a few weeks and cut the P/E further to 18.5x with a year-end target of 26,000. With the conflict having lasted for almost the full year and long term crude supply issues likely, we cut our target further to 25,000," the analysts wrote.
LTCG tax cut & FII flows
A reduction in long-term capital gains (LTCG) tax would be desirable for a capital-starved economy, but would be insufficient on its own to trigger sustained foreign institutional investor (FII) inflows, Bernstein said. A recovery in India's growth and earnings cycle remains critical.
"A sharp 1–2 day market rally that a cut would trigger may actually be used to offload positions," Garre said.
Finance Minister Nirmala Sitharaman had recently said the government was open to hearing suggestions on removing LTCG tax during consultations ahead of the upcoming Union Budget. READ ABOUT IT HERE
Bernstein also sees limited scope for India to benefit materially from a near-term pause in the artificial intelligence (AI) trade. According to the brokerage, Indian equities currently offer neither the return profile nor the investment opportunities attracting global capital into AI-related investments.
Macroeconomic headwinds
India's macroeconomic backdrop is deteriorating, and the sharp market correction last month reflects these challenges, Bernstein said. The brokerage sees limited room for policy support, while the boost from goods and services tax (GST) gains is likely to fade as base effects set in and prices rise.
Weaker monsoons and substantially lower reservoir levels also pose risks heading into next year, it added.
"Yields are firming, while crude and commodity prices remain a challenge. Geopolitics is also unfavorable, with limited visibility on a US trade deal and continued risks around Russian oil sourcing despite waivers. Against this backdrop, the heady macro growth of the previous quarter is unlikely to repeat," Garre said.
Earnings outlook
The earnings outlook, too, offers little comfort. Bernstein said consensus earnings estimates for FY27 have seen only a marginal upward revision of 0.2 per cent over the past three months, with several sectors continuing to face downgrades.
Margins remain a key near-term risk. Companies passing on higher input costs through price increases could protect profitability, but this may come at the expense of demand and growth, the brokerage said.
With crude oil prices surging towards $110, limited inventory buffers and persistent supply-chain pressures are adding to the challenges. Bernstein also sees limited room for further rupee appreciation, estimating that the currency has scope for a rally of only another 3-4 per cent, more than half of which has already played out.
The impact of currency movements will vary across sectors. Rupee depreciation could support earnings in rupee terms for export-oriented industries such as information technology, healthcare and automobiles, while raising input costs for businesses that rely heavily on imports.
"So it is a balancing act across most consumption sectors. Rupee depreciation helps earnings (in rupee terms) for some export-facing sectors (IT, healthcare, and autos) but also lifts broader costs for several others where imports are a key part of the cost structure. Pricing power remains largely in specific industrial verticals with tight supply," the note said.