Since the outbreak of the US-Iran conflict in late February, India's large-cap stocks have lagged amid sluggish earnings growth, while mid- and small-caps have emerged as market leaders. Since 27 February, the last trading day before the conflict began, the benchmark Nifty50 has fallen 4.7%. In contrast, the Nifty Midcap 150 and Nifty Smallcap 250 have gained 3.8% and 9.4%, respectively, with both indices hitting fresh highs in May.
As a result, the combined share of mid- and small-caps in the Nifty 500's market capitalization rose to a record 35.8% as of 14 June, according to Yes Securities.
The shift in capital away from blue-chip stocks, traditionally viewed as safer bets, underscores a growing appetite for risk as investors pursue companies with stronger earnings growth prospects. According to Yes Securities, the share of the Nifty Midcap 150 and Nifty Smallcap 250 in NSE cash turnover increased to 28.19% and 22.92%, respectively, in FY26, from 26.63% and 22.21% in FY25, while the share of large-caps declined.
Strong growth
In the second half of FY26, mid- and small-cap companies benefited from goods and services tax (GST) cuts and benign liquidity conditions, while large-caps grappled with softer global demand. Large-caps are also perceived as more vulnerable to foreign institutional investor outflows. Among BSE 500 companies, excluding oil marketing firms, mid-caps posted the strongest profit growth at 21% in FY26, up from 15% a year earlier, followed by small-caps at 11%, compared with 2% in FY25. Large-cap profit growth remained subdued at 7%, according to Nuvama Research.
The June quarter (Q1FY27), however, is expected to be challenging across market-cap segments as companies contend with cost inflation despite price hikes.
Still, easing crude oil prices could provide some relief. Expectations of a US-Iran peace deal and the reopening of the Strait of Hormuz have pulled Brent crude below $80 a barrel from more than $100 earlier. Lower crude prices should ease input-cost pressures for India Inc., helping sustain investor interest in mid- and small-caps.
Valuations, however, remain a concern. The Nifty Midcap 150 and Nifty Smallcap 250 trade at one-year forward price-to-earnings multiples of 24x and 20x, respectively, compared with 16x for the Nifty50, according to Bloomberg data. While both segments trade below their five-year average valuations, they are far from cheap.
To justify current multiples, companies will need to deliver on consensus expectations of more than 20% earnings growth in FY27. Any adverse impact from an El Nino-led disruption to rural incomes and consumption could put that optimism to the test.