Nifty consolidation historically sets up 18% next-year gains: Edelweiss

A prolonged sideways trade in the Nifty 50 may be building the base for a sustained rally, according to a study by Edelweiss Mutual Fund. The fund house examined 10 prior consolidation phases since 2000 where the index stayed in a tight range for at least three months. In eight of those cases, the index broke out to the upside within six months and delivered an average return of 18% in the year after the breakout.

The two exceptions were 2008 and 2020, years defined by external shocks – the global financial crisis and the Covid crash. In each case, the consolidation broke to the downside first before recovering. Edelweiss argued the current setup lacks a comparable macro trigger. Domestic flows remain strong, with mutual funds and insurance companies adding equity exposure each month. Foreign portfolio investors turned net buyers in April after selling through most of March.

The Nifty has oscillated in roughly a 5% band since late February, between 22,000 and 23,100. That kind of compression flushes weak hands and builds a base for the next leg higher, the study said.

Valuations are not cheap. The Nifty trades at about 20 times forward earnings, above the 10-year average of 18.5 times. Edelweiss noted that elevated multiples alone have rarely ended bull markets. A sharper signal has been a surge in earnings expectations that then fails to materialize. Consensus expects Nifty earnings to grow 15% in FY26. The fund house sees that as achievable, given the margin recovery underway in banking and the pickup in capital expenditure.

Banking is the swing factor. HDFC Bank, the index's heaviest weight, has been a drag during the consolidation. The stock is down 8% from its February high, held back by concerns about deposit growth and net interest margin compression. If HDFC Bank stabilizes, the index gets a direct lift. The bank's Alpha Score on AlphaScala sits at 47 out of 100, a Mixed reading that reflects uncertainty around near-term earnings but also the potential for a re-rating if deposit trends improve.

Infosys and Wipro, two other heavyweights, have also been range-bound. Infosys carries a Moderate Alpha Score of 57, while Wipro scores 46, also Mixed. The technology sector has been waiting for a clear signal on US demand and client spending. The next trigger is the June quarter earnings season, starting in mid-July. If the commentary from Infosys and its peers points to a recovery in discretionary spending, the sector could lead the next leg of the rally.

The Edelweiss study did not call a specific breakout level or date. It framed the consolidation as a constructive phase that rewards patience. The risk is that the sideways move extends longer than historical averages, testing investor conviction. The fund house's central case is that the Nifty is building a base, not a top. For traders, chasing breakouts above 23,100 carries less risk if the index has already spent weeks compressing below that level. A clean move above 23,200 with volume would confirm the pattern. A break below 22,000 would invalidate it.