Large-cap stocks have been better at generating returns above the broader market, often referred to as alpha, a Mint analysis has found. It shows that 52% of Nifty 50 stocks hit their 52-week highs between January and June 2026, compared with 31% in the Nifty Midcap 100 and 27% in the Nifty Smallcap 250.
However, as domestic investors continue to drive the market while foreign investors remain net sellers, market participants believe a bigger, long-term return opportunity lies in well-selected small- and mid-cap (Smids) stocks rather than large-caps. The key, they say, is staying invested in quality Smids) over the long term.
“This is more a reflection of the dynamics of domestic institutional flows into equities,” said P. Krishnan, managing director & chief investment officer (CIO) - equity asset management, Spark Asset Management. The performance divergence across sectors and market-cap buckets has been driven by rotational interest, he said.
Small- and mid-caps fell sharply in the early phase of the Iran war, creating a buying opportunity that domestic funds capitalised on aggressively. With a small free float, limited liquidity and relatively low foreign portfolio investment (FPI) holdings in many of these stocks, strong domestic inflows sparked a swift rally. In short, domestic liquidity has been the key driver, he said.
Select Smids still hold promise
While a larger share of large-cap companies may have hit 52-week highs, earnings have remained resilient across the board, with mid- and small-cap stocks showing greater strength, said Aniruddha Naha, CIO - alternates, PGIM India Asset Management Co. Given the earnings trends and the breadth of opportunities in the mid- and small-cap segment, long-term wealth will be generated in this market cap.
“If we take a look at the alpha generation since 2005, which included the financial crisis of 2008, the highest 3-year rolling return alpha has been created in the small and micro cap space.” Invariably, if investors have the patience and appetite to ride out volatility, small and micro cap will probably generate the highest alpha going ahead also, he added.
Yogesh Shroff, smallcase manager and partner at research firm Magnus Hathaway, believes the small-cap segment offers the highest alpha generation opportunity over the next 12–18 months, provided investors remain highly selective.
"Markets are no longer rewarding companies simply based on market capitalisation; they are rewarding businesses where earnings are sustainable and the growth runway is long." He believes the key reason is earnings, with the small-cap universe continuing to deliver meaningfully stronger earnings growth than large-caps, and several companies still reporting 20–25% growth. While valuations in some pockets are no longer cheap, businesses that can sustain high earnings growth over the next few years continue to offer meaningful potential to outperform the market, he said.
Large-caps, on the other hand, remain relatively more influenced by macro variables such as crude oil prices, global growth and foreign institutional flows, which could keep their upside more measured than select opportunities in the broader market.
What's interesting is that quality is no longer confined to large-cap companies. Whether it is a large-cap, mid-cap or small-cap, companies that consistently deliver earnings growth, healthy cash flows and improved return ratios are attracting capital.
Consensus estimates now build in mid-teen earnings growth for the Nifty in FY27/28, with mid- and small-cap earnings expected to grow somewhat faster, according to Shibani Kurian, senior fund manager and head-equity research, Kotak Mahindra AMC.
Will Smid leadership last?
A look at the index performance shows that mid- and small-caps have clearly outperformed large-caps in 2026 so far. While the Nifty 50 is down 9% year-to-date, the Nifty Midcap 100 and Nifty Smallcap 250 have gained nearly 2% and 5.4%, respectively. However, some believe the trend is likely to reverse in the second half of the financial year.
“While it is a fact that typically large and mid-cap businesses are more resilient over small caps, the opportunity going forward will be found across the spectrum on a bottom-up basis,” said Gaurav Misra, head – equity, Mirae Asset Mutual Fund, who manages the large-cap fund. The opportunities for value creation will come from a combination of growth (and its quality), quality of business and management and the starting valuations, he added.
While only a few sectors, such as capital goods and metals, have done well this year, Misra does not believe the rally is very concentrated, as small- and mid-caps have delivered positive mid-single-digit returns, outperforming large-caps, which remain in negative mid-single digits. He believes the West Asia war has contributed to this trend, and if tensions ease in the second half of the year, market breadth could improve significantly.
“The probability of market breadth improving from here will be influenced by whether some of the headwinds impact earnings recovery. Valuations do not offer any margin of safety across most stocks. We need to see earnings delivery continuing," Spark Asset Management's Krishnan said.