India equities: UBS sees 12% Nifty upside by 2026

India may not have a single, dominant AI-led market narrative right now, but UBS argues that the equity market can still deliver positive returns if earnings broaden and cyclicals catch up. In a market strategy discussion around UBS AIC 2026, the firm highlighted improving corporate commentary, early signs of recovery across parts of the economy, and growing engagement from foreign institutional investors (FIIs) who had largely stayed away for years.

UBS’s central message was clear: the next leg of the market will depend less on headlines and more on whether earnings move from the recent mid-single-digit pace toward higher double-digit growth. It also expects sector leadership to widen, with financials, consumption, defence, power and even quick commerce among the areas seeing rising investor attention.

What UBS says is changing in the market

UBS said India is showing “tangible early signs of recovery,” with corporate earnings experiencing their strongest recovery in more than a year and brokerages anticipating robust profit growth in the second half. The firm linked the improving tone to better company commentary during the earnings season and a gradual shift in investor positioning.

A key development UBS pointed to was the return of bottom-up stock interest from FIIs. It described pockets of interest emerging, with foreign investors starting to ask more detailed questions again after being absent for close to five years. At the same time, UBS noted that valuations are still rich, particularly across autos, consumption and industrials, even if relative pressure is easing as global markets correct and earnings stabilise.

Earnings recovery is the trigger UBS is watching

UBS believes the market breaks out of its recent consolidation only if earnings shift toward higher double-digit growth. It cited the Nifty’s latest quarter delivering 8-10% PAT growth, while adding that margins remain soft.

The firm’s broader base case assumes an earnings acceleration over the next two years, with earnings per share (EPS) growth projected at 13.6% for FY26 and 13.5% for FY27. In UBS’s view, improving sales trends and better profit margins across key sectors underpin this recovery.

Why financials are central to the next upcycle

UBS sees financials as a decisive piece of the earnings puzzle, because the sector is a heavyweight in benchmark indices and can lift overall profit growth if momentum improves. It listed several drivers that could support a financials-led earnings recovery:

• Early signs of credit standards easing
• Banks turning more aggressive, supporting improving credit growth
• Recent RBI and fiscal easing, which may take a few quarters to reflect fully
• Financial system stability, with non-performing loans (NPLs) no longer rising

UBS said bank stocks remain attractive and reiterated that it is positive across the BFSI basket. But it recommended a stock-specific approach rather than framing the opportunity as PSU versus private, noting that both look strong while growth differentiation will matter.

Where investors are focusing beyond banks

UBS’s discussion suggested that a catch-up from cyclical sectors could broaden the rally. It also said robust earnings growth from other parts of the market should help drive stocks higher.

In sector terms, it flagged interest across:

• Consumption, including the view that big FMCG companies could benefit if inflation returns
• Short-cycle industrials, described as preferred bets
• Defence, still viewed as a long-term secular growth story
• Power and quick commerce, where optimism is building alongside other themes

The firm also noted that FPIs continue to ask questions around India’s energy security, tying this to global geopolitical risks and energy concerns that investors are tracking.

India in global portfolios: positive returns even without outperformance

UBS’s commentary also addressed a recurring question in global allocation decisions: India could deliver a positive return year even if it underperforms some other emerging markets due to themes like the AI trade playing out elsewhere. In other words, relative performance and absolute returns are not mutually exclusive.

UBS added that domestic money remaining supportive and an earnings recovery strengthening further could help sustain positive market performance, even as foreign flows, valuation levels, and global risk appetite continue to shape day-to-day sentiment.

Valuations, style preference, and what to watch

UBS acknowledged that valuations remain elevated. It also flagged a market structure risk worth monitoring: retail flows have been supportive, but selling pressure from foreign investors and rising IPO capital raising activity by corporates should be watched.

On positioning, UBS said it prefers large and mid-cap stocks over small caps, pointing to higher valuation premiums in small caps. It also noted that the Nifty’s forward P/E is now slightly above 20x, which UBS believes is supported by earnings growth expectations over the next two years.

Key figures from UBS’s outlook

Market impact: what this implies for sectors and sentiment

If financials deliver the credit-led earnings improvement UBS is expecting, it could have an outsized impact on index-level earnings due to the sector’s weight. UBS’s sector preferences also imply a barbell approach in portfolios: steady compounders such as consumer staples, alongside more cyclical exposures like short-cycle industrials and infrastructure-linked themes.

UBS also connected India’s outlook with global policy conditions. It expects greater clarity and stability in US trade and fiscal policy to emerge over the second half of 2025, laying groundwork for stronger market performance in 2026 and beyond. It also said India is well positioned to strike a trade deal with the US before a 90-day pause ends, while reiterating that tariff discussions and global uncertainties remain part of the backdrop.

Analysis: why the earnings inflection matters more than narratives

UBS’s framing puts earnings quality and breadth ahead of thematic narratives. The firm’s emphasis on a shift to higher double-digit growth highlights why the market’s next move may hinge on operating leverage and margins, not just top-line resilience.

Equally, the return of FIIs to bottom-up stock selection is significant because it suggests a shift from broad “India valuation” debates to company-specific underwriting. That does not remove valuation risk, but it can change how capital is deployed, particularly if earnings delivery improves.

Conclusion

UBS sees early signs of a real earnings and market recovery in India, with banks and select defensives in focus and cyclicals potentially broadening the rally. The next catalyst, by UBS’s own framework, is whether earnings growth accelerates toward higher double digits over FY26 and FY27, with investors also watching policy transmission, credit growth, and global energy and trade risks.