Nifty’s early comeback signal: Why largecaps are holding up as broader market slides

India’s broader equity market remains under pressure, but the Nifty’s relative resilience may be offering the first indication that largecaps are beginning to regain market leadership. The Nifty has recovered to a broadly flat return in October after falling 6% in September. The Nifty Midcap 150, however, has declined 4% this month following a 7% fall in September, while the Nifty Smallcap 250 is down 4.5% in October after losing 3% last month.

The divergence suggests that the broader-market selloff is not over. But it also raises a more constructive possibility that largecaps are beginning to stabilise first, potentially laying the foundation for a wider market recovery.

The shift reflects a combination of valuation, liquidity and earnings visibility. Investors who crowded into mid- and smallcaps are now reassessing the risk-reward equation, while largecaps are benefiting from more reasonable valuations and stronger institutional preference.


“Mid- and smallcap indices were trading at a premium valuation, even accounting for their higher growth expectations, while largecaps were already at reasonable valuations for the growth expectations from them,” Vikas Gupta, CEO and Chief Investment Strategist at OmniScience Capital, told ET Markets.

As the likelihood of higher interest rates increased, investors were no longer willing to pay the same premium for mid- and smallcap risk, Gupta said. The move towards largecaps could be described as a “flight to safety,” but also as a “flight to (potential) alpha”.

Kotak Institutional Equities said high and rising crude prices, the Iran-US conflict and related macroeconomic risks may have “punctured the euphoria” in the small- and midcap segment and encouraged investors to look more favourably at largecaps, where valuations have become more reasonable.

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The Nifty is also receiving support from earnings resilience. Based on companies that had reported, Q2 net profits of Nifty50 companies were up 19% from a year earlier and 1.7% above Kotak’s estimates. EBITDA rose 13% year-on-year and was 0.7% ahead of expectations.

Kotak expects Nifty earnings to grow 18% in FY2027 and 13% in FY2028. The Nifty Midcap 150 is expected to deliver higher earnings growth over FY2028-29, but the faster growth has not been enough to offset the impact of elevated valuations and weakening risk appetite.

The valuation reset has been sharper in the broader market. Kotak said the Nifty was trading at 18.3 times estimated FY2027 earnings and 16.2 times FY2028 earnings, while also noting that the benchmark had seen a steady derating in recent months. The midcap segment has undergone a sharp derating as investors have become less willing to pay a premium for projected growth.

The allocation imbalance between market segments could further support a shift towards largecaps. According to September AMFI data cited by Gupta, midcap funds had assets of more than Rs 5.14 lakh crore and smallcap funds Rs 4.6 lakh crore, compared with Rs 3.9 lakh crore for largecap funds.

That is sharply different from the broad market-weight structure, where largecaps typically account for 65%-70%, midcaps 15%-20% and smallcaps 10%-15%. Gupta expects this imbalance to eventually normalise, which could lead to further rotation from mid- and smallcaps towards largecaps.

Yet the Nifty’s strength should not be mistaken for a complete market turnaround. The broader market continues to face pressure from high crude prices, macroeconomic uncertainty and concerns about earnings downgrades. Kotak said a durable end to the Iran-US conflict, normalisation in crude prices, a stronger earnings outlook and a greater focus on value could help the market emerge from its current weakness.

The current divergence may therefore represent an early phase of market leadership changing hands rather than a confirmed bottom. Largecaps are holding up because they offer greater liquidity, more visible earnings and a valuation profile that has become relatively more attractive. Mid- and smallcaps, meanwhile, are still working through the excesses of the earlier rally.

Kotak’s bottom-up analysis also cautioned against drawing broad conclusions from index-level earnings. A relatively small number of sectors and companies account for a significant share of the profits of both the Nifty and the Nifty Midcap 150. The brokerage said this makes stock-specific analysis more useful than assuming an entire market cap segment will move together.

For Gupta, however, the correction is beginning to create a more favourable environment for stock pickers. Mid- and smallcaps are now closer to reasonable valuations, although they may still be outside his comfort zone at the index level. The correction may also be hiding individual companies whose valuations have become attractive.

“The alpha hunters would not bother about whether markets could go still lower,” Gupta said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)