Growth prospects and improved profitability: Goldman Sachs becomes optimistic about the Indian stock market again after a year.

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After a year of cautious stance due to high valuations and slowing earnings growth, Goldman Sachs has recently turned positive on the Indian stock market and upgraded its rating to “Overweight.” The bank believes that supportive government policies, improving corporate earnings prospects, and low foreign investor holdings together create favorable conditions for this $5.4 trillion market.

According to news from Wind Trading Desk, Goldman Sachs on November 7 released a report setting a year-end 2026 target of 29,000 points for the National Stock Exchange Nifty 50 Index, implying about 14% upside from current levels. The bank had downgraded its Indian stock rating in October last year due to excessive valuations and slower anticipated profit growth.

Goldman’s optimistic outlook aligns it with institutions such as Société Générale and HSBC Holdings, both of which also expect a rebound in Indian stocks. Since 2025, the performance of India’s stock market has significantly lagged behind other markets in the region, marking the largest underperformance in over two decades. Now, with valuation pressures easing and growing anticipation of economic recovery from policies such as interest rate cuts and cuts to consumption taxes, investor confidence is rebounding.

“We have reason to believe the Indian stock market will perform better in the coming year,” wrote Goldman Sachs analysts in the report. They expect, under a more favorable macro environment, earnings growth for MSCI India Index constituents will accelerate from 10% in 2025 to 14% in 2026.

Reversal of Fortunes: A Turnaround after Underperformance

Goldman Sachs stated that in 2025 India’s stock market performed flatly, with the MSCI India Index up only 3% in dollar terms, while emerging markets overall surged 30% during the same period. The report notes this represents Indian stocks’ largest annual underperformance versus emerging markets in the past twenty years.

This pronounced underperformance stemmed from rich valuations at last year’s market peak, as well as expectations that economic and corporate profit growth were entering cyclical slowdown, prompting Goldman Sachs to downgrade its view on India last October. As 2025 corporate earnings expectations continued to be revised down, further combined with macro headwinds such as U.S. tariffs and increased H1B visa costs, market sentiment further deteriorated, leading to large-scale foreign capital outflows. Data shows that since the market peak in September 2024, foreign investors have been net sellers of nearly $30 billion of Indian stocks.

Four Reasons for Reversal: Policy, Earnings, Positions, and Valuation

Goldman Sachs believes the current year-long earnings downgrade cycle is stabilizing and showing signs of recovery; combined with a policy-driven accommodative financial environment, the Indian stock market is set to reverse prior underperformance in the coming year. The bank lists four key arguments supporting its optimism:

Supportive Policies: The report notes that the Reserve Bank of India has taken a series of accommodative measures this year, including interest rate cuts, improved banking system liquidity, and relaxed regulation. At the same time, the government has slowed fiscal tightening and implemented cuts to personal income tax and goods and services tax (GST), which should help boost economic growth and mass consumption recovery over the next two years.Earnings Recovery: Goldman Sachs expects the profit growth of MSCI India Index constituent companies to recover from this year’s 10% to 14% in 2026 and 2027. The report points out that after a year of downgrades, earnings have stabilized and even started to be upgraded in some sectors. The third quarter of 2025 overall delivered better-than-expected results, providing evidence of a bottoming out and rebound in earnings.Low Foreign Investor Holdings: Growth slowdown and earnings downgrades have led foreign institutional investors to sell large amounts of Indian stocks over the past year, with the net sale reaching the second highest in history. As a result, mutual fund allocations to India and overall foreign holdings have both dropped to their lowest levels in nearly two decades. Goldman Sachs believes that as earnings recover, foreign investors’ risk appetite and fund flows may improve.Defensive Valuations: Although Indian stocks’ 12-month forward P/E is around 23 times, making it one of the most expensive emerging markets, Goldman Sachs considers valuation risks manageable. India’s valuation premium to other Asian markets has dropped from the peak of 85-90% to around 45%, close to its historical average. Historical data shows that at the current premium level, Indian shares have typically mildly outperformed other Asian markets over the next 6-12 months.

Favoring Financials, Consumption, and Domestic Themes

With its “Overweight” rating, Goldman Sachs suggests investors focus on sectors that benefit from the domestic economy and highlights four main investment themes:

Favored Sectors: Goldman Sachs is bullish on Financials, Consumer (staples, durables, autos), and Defense sectors. The report believes the financial sector will benefit from credit growth; consumer recovery will benefit consumer stocks; and the government’s focus on localization and self-sufficiency provides strong order visibility for the defense sector. In addition, Technology, Media & Telecom (TMT) and Oil Marketing Companies (OMCs) are also rated Overweight.Underweight Sectors: At the same time, Goldman Sachs holds a cautious view on export-oriented industries, downgrading Information Technology (Infotech) to Underweight, and remaining bearish on Pharmaceuticals, Industrials, and Chemicals. The report notes low growth visibility and AI-induced uncertainty in IT.Core Themes: Goldman Sachs recommends four thematic investment opportunities: (1) “Domestic Self-sufficiency,” focusing on Defense and Energy Security; (2) “Mass Consumer Recovery”; (3) “New Economy,” including digital consumption and electric vehicles, etc.; (4) “High-growth stocks with reasonable valuations.”

Despite the optimistic outlook, Goldman Sachs also highlights several major risks in the report. First, if the recovery in domestic growth and corporate earnings disappoints, this would fundamentally challenge its positive view. Second, persistent external headwinds, such as U.S. tariff issues, could continue to dampen corporate investment. In addition, a correction in global markets (especially in the U.S.) due to high valuations and “AI bubble” concerns could also affect India through sentiment and valuation channels. Finally, investors worry about the lack of pure AI beneficiaries in the Indian market, as well as the potential negative impact of AI on IT services employment, which may suppress foreign investors’ risk appetite.

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The above highlights are from Wind Trading Desk.

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