Nifty valuations near post-Covid lows; mid-caps and AI sectors offer opportunities

India's benchmark Nifty 50 is undergoing a significant valuation reset, with its forward price-to-earnings multiple declining to 17.4 times from 21.5 times two years ago, according to Alchemy Capital Management Deputy CIO Alok Agarwal. Despite delivering no returns over this period, the index is now trading near its cheapest level since the Covid pandemic. Agarwal attributes the valuation compression to a correction phase, noting that prices had run ahead of profits while earnings growth remained subdued for nine consecutive quarters.

Agarwal emphasizes that current valuations represent a reasonable level where long-term returns typically commence, distinguishing them from panic-driven Covid-crash levels. He identifies the shift as a structural broadening rather than a late-cycle rotation, supported by earnings trends. Mid- and small-cap companies have continued delivering earnings growth, with many underperforming large-caps in 2026. Agarwal identifies AI infrastructure, healthcare, manufacturing, and selected defence sectors as offering meaningful investment opportunities alongside mid-cap and small-cap stocks.

The analyst's outlook suggests the next phase of market gains will extend beyond large-cap stocks, with earnings growth emerging across broader market segments. Global yields and foreign portfolio investor flows remain critical factors influencing market direction.