Global Investment Bank Upgrades India Outlook, Favors Large-Caps, Banks, Defence and Power Stocks as Domestic Recovery Gains Momentum

Global investment banking giant Goldman Sachs has significantly upgraded its outlook on Indian equities, stating that the worst phase of foreign institutional investor (FII) selling appears to be over and that India is well positioned to witness a meaningful return of overseas capital over the next 12 months.

In its latest India Strategy Report, the brokerage believes improving domestic macroeconomic conditions, attractive valuations in large-cap stocks and relatively light foreign ownership provide a favourable backdrop for Indian equities. Goldman Sachs has projected the Nifty 50 Index to reach 26,500 by June 2027, indicating an upside potential of around 10% from current levels.

The revised outlook marks a notable shift from the firm's cautious stance earlier this year and reflects growing confidence in India's long-term growth prospects despite persistent geopolitical risks and global economic uncertainties.

A Sharp Turnaround in Goldman Sachs' India View

Goldman Sachs' latest report represents a meaningful reversal from its outlook published in May 2026.

Earlier this year, the brokerage had expressed concerns over:

• Expensive market valuations.

• Slowing earnings momentum.

• Better opportunities in North Asian markets.

• Limited scope for immediate FII inflows.

• The potential impact of Artificial Intelligence (AI) on India's technology sector.

However, after reviewing recent macroeconomic developments, corporate earnings expectations and market positioning, the global brokerage now believes that several of these concerns have eased considerably.

The report suggests that India's domestic growth story is becoming increasingly attractive relative to many other emerging markets.

Foreign Investors Have Significant Room to Return

One of the strongest arguments presented by Goldman Sachs is the current positioning of global investors.

According to the brokerage, international funds sold nearly $30 billion worth of Indian equities during the first half of 2026, making India one of the most aggressively sold emerging markets during that period.

This sharp reduction in foreign holdings has left many global portfolios significantly underweight on India.

Since mid-June, however, FIIs have gradually returned as buyers, investing nearly $2 billion, primarily in banking and financial services stocks.

Goldman Sachs believes this is only the beginning of a broader allocation cycle.

With foreign ownership currently well below historical averages, the brokerage expects overseas investors to steadily rebuild their India exposure as economic visibility improves.

Domestic Fundamentals Continue to Improve

The brokerage highlighted several positive developments supporting its constructive view on Indian equities.

Key Growth Drivers

• Improving domestic economic activity.

• Strong consumption trends.

• Continued government infrastructure spending.

• Stable banking sector.

• Healthy corporate balance sheets.

• Record domestic mutual fund inflows.

• Rising retail investor participation.

India's structural growth story remains supported by favorable demographics, urbanisation, digital adoption and increasing formalisation of the economy.

These long-term factors continue to differentiate India from several other emerging markets.

Nifty Target Raised to 26,500

Despite acknowledging that markets could remain volatile in the short term due to geopolitical tensions in West Asia and fluctuations in crude oil prices, Goldman Sachs remains optimistic about the broader market outlook.

Goldman Sachs Market Outlook

The brokerage believes improving earnings visibility and renewed foreign participation could gradually lift benchmark indices over the next year.

FII Flow Trends Are Showing Early Signs of Recovery

Foreign institutional investors have been one of the biggest concerns for Indian markets over the past several months.

Recent FII Activity

Although cumulative flows remain negative, July has witnessed a noticeable improvement, indicating that overseas investors may gradually be returning to Indian equities.

If this trend continues, FIIs could once again become an important driver of market performance.

Large-Caps Becoming More Attractive

Another major theme highlighted in the report is the improving valuation comfort among large-cap stocks.

Goldman Sachs noted that:

• Large-cap valuations have corrected closer to long-term historical averages.

• Mid-cap stocks continue to trade at a noticeable premium.

• Risk-reward appears significantly more favourable in large-cap companies.

The brokerage expects investors to gradually rotate their portfolios towards fundamentally strong large-cap businesses with stable earnings and attractive valuations.

Shift From Growth to Value Investing

The report also signals a possible change in market leadership.

According to Goldman Sachs, investors are increasingly looking beyond expensive growth stocks and focusing on businesses offering:

• Reasonable valuations.

• Stable cash flows.

• Strong balance sheets.

• Predictable earnings growth.

This rotation from growth investing towards value investing could benefit sectors that have lagged the market in recent years.

Goldman Sachs' Preferred Sectors

The brokerage has identified several sectors expected to outperform during the second half of 2026.

Overweight

• Banking & Financial Services

• Defence

• Power Utilities

• Tourism

• Energy

Market Weight

• FMCG

Underweight

• Information Technology

• Pharmaceuticals

• Metals & Mining

• Cement

• Oil Marketing Companies (OMCs)

Goldman Sachs believes utilities could benefit from rising electricity demand, while defence remains supported by increasing government spending and strong order inflows.

Top Stock Picks for H2 CY2026

The brokerage has identified the following companies as its preferred investment ideas:

• Reliance Industries

• HDFC Bank

• Kotak Mahindra Bank

• NTPC

• Power Grid Corporation

• Adani Power

• Adani Enterprises

• Adani Green Energy

• Hindustan Aeronautics (HAL)

• Mazagon Dock Shipbuilders

• InterGlobe Aviation (IndiGo)

• Indian Hotels Company

• HDFC Life Insurance

• Eternal (formerly Zomato)

• MakeMyTrip

These companies are expected to benefit from improving earnings visibility, stronger domestic demand and favourable sector-specific trends.

Risks That Investors Should Monitor

Despite its optimistic stance, Goldman Sachs cautions that several risks remain.

Key Risk Factors

• Escalation of geopolitical tensions in West Asia.

• Sustained increase in crude oil prices.

• Weak corporate earnings.

• Delayed recovery in private capital expenditure.

• Higher global interest rates.

• Volatility in currency markets.

• Slower global economic growth.

Any of these factors could lead to intermittent market corrections despite the favourable long-term outlook.

What This Means for Investors

Goldman Sachs believes investors should gradually reposition portfolios to benefit from India's improving macroeconomic environment.

The brokerage recommends:

• Increasing exposure to quality large-cap stocks.

• Focusing on sectors with reasonable valuations.

• Avoiding excessively expensive segments.

• Maintaining a long-term investment perspective.

The report also suggests that the current phase could provide opportunities for disciplined investors to accumulate fundamentally strong companies before broader foreign participation gathers pace.