New Delhi [India], January 10 : Global brokerage firm Bernstein has revised its outlook on Indian equities to 'Neutral' from 'Selective Buy', citing stretched valuations, limited policy headroom, and a lack of fresh macro catalysts to drive outsized returns in 2026.
According to Bernstein, 2026 brings no new tailwinds to Indian equity markets. By definition, a Neutral rating means that returns on investments are likely in line with broader market returns.
The downgrade comes after several years of strong market performance fuelled by government-led capital expenditure, robust domestic inflows and optimism around the China+1 manufacturing narrative.
In its India Strategy Outlook published recently, Bernstein said the Indian equity story is not turning negative but is instead entering a quieter phase.
"Enter 2026, and the ink is beginning to run thin. In our view, this is not a crisis moment, but rather burdened by its own past. It's the year that promises many things: few rate cuts, a slight return of private capex, and a tentative trade deal - but we believe these "little bits of everything" do not carry enough momentum to keep the India story at heights we've been used to seeing," the Bernstein report read.
"So we're cutting India from our selective buy view last year to a neutral view, not because the franchise has lost appeal, but because policy levers are largely exhausted and macro as reflected by real GDP growth is closer to a peak."
Bernstein highlighted that the government's aggressive post-pandemic capex cycle is nearing its limits.
With fiscal deficits still elevated and tax collections relatively softened, room for further large-scale public spending is constrained, it noted.
While another 50-75 basis points of rate cuts may be possible, analysts believe these would be insufficient to reignite strong momentum, especially as private sector capital expenditure remains subdued due to moderate capacity utilisation levels.
Valuations were a central concern behind the downgrade by Bernstein.
India remains among the most expensive equity markets globally, trading above 20 times forward P/E ratio, compared with an average of about 15 times across major economies tracked by Bernstein.
In such an environment, the firm expects returns to be capped, with the Nifty 50 projected to deliver a modest 7.5 per cent return in 2026 for Nifty, with a target of 28,100.
External risks also loom large. Bernstein flagged uncertainty around US trade policy, including the durability of any India-US trade framework, and warned that tighter H-1B visa norms could weigh on India's IT services sector.
Overall, Bernstein said 2026 is likely to be a year of "little bits of everything," but without a single dominant theme powerful enough to justify a firm market stance.
Bernstein starts the year with continuing its overweight rating on financials, Telecom and select picks in consumption sectors (discretionary).
"We move to a modest overweight on IT, as we see modest expectations. We introduce real estate as an overweight sector. IT and real estate were the worst performers in 2025. We downgrade consumer staples to equal-weight on staples given most catalysts have played their part already and given continued disruption risk as organized channels accelerate fund raise. We retain equal weight on metals, healthcare and utilities and stay underweight Industrials," the report stated.
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