Jefferies strategist Christopher Wood suggests Indian large-cap stocks are primed for a comeback as their valuation gap relative to mid-caps reaches decade highs. While mid-caps have enjoyed strong domestic inflows, upcoming earnings forecasts indicate a potential shift in growth momentum toward larger companies over the next two years.
Christopher Wood, global equity strategist at Jefferies, recently highlighted a potential turning point for Indian large-cap stocks. He noted that the valuation spread between large-cap and mid-cap indices has become unusually wide. Currently, the Nifty 100 trades at a 33% discount to the Nifty MidCap 150 based on one-year forward price-to-earnings ratios. This is significantly broader than the 20% average discount observed over the last ten years.
Earnings Growth Projections
While mid-cap stocks have dominated market performance recently, driven largely by consistent domestic mutual fund inflows, the fundamental earnings story may be shifting. Over the past two years, the Nifty MidCap 150 index reported compound annual earnings growth of approximately 18%, compared to 8% for the Nifty 100. However, projections for the next two fiscal years suggest this gap will narrow considerably. Analysts at Jefferies expect large-cap earnings growth to rise to an annualized 14-15%, while mid-cap growth is forecasted to moderate to around 20%.
Impact of Domestic and Foreign Flows
The mid-cap rally has been anchored by sustained retail participation, particularly through Systematic Investment Plans (SIPs). This domestic strength has led to a lower market concentration in top-tier stocks, which currently account for 28% of total market capitalization, the lowest level since 2000. Conversely, foreign institutional investors have been net sellers for much of the year, often moving capital into tech-heavy markets like South Korea and Taiwan. There are early signs of a potential reversal, with foreign investors turning net buyers in July, which could provide support to large-cap stocks that typically attract more foreign capital.
Macroeconomic and Policy Risks
Beyond valuations and earnings, the broader economic environment presents both supporting factors and challenges. Bank credit growth reached 18.6% year-on-year as of June 30, 2026, indicating strong domestic business activity. However, the Reserve Bank of India faces pressure from inflationary trends, with expectations of a potential 25 basis point rate hike later this year. Additionally, the country faces structural hurdles regarding new foreign direct investment, as recent data shows a high volume of private equity exits rather than fresh capital deployment.
Investors should also track the impact of global energy prices. As a net importer, India remains sensitive to oil price fluctuations, which can affect government spending on infrastructure and put pressure on the current account. While the market remains supported by domestic flows, the speed at which the expected earnings gap between large-caps and mid-caps narrows will be a key factor in whether this tactical shift takes hold.